As gold demand surges, FM may have to impose more curbs

India may be forced to introduce more curbs on gold imports, if gold import trends in the first quarter (April-June) are any guide. Thanks to falling international prices, Indians went on a buying spree which saw consumer demand zoom 71 percent to 310 tonnes, driven by jewellery demand (up 51 percent) and coins and bars (up 116 percent), the World Gold Council reported yesterday.

In response to the robust demand for gold after its price fell, the government has raised customs duties (to 10 percent), banned imports of gold coins and medallions, and imposed export obligations on other gold importers, among other things.

Finance Minister P Chidambaram also said the other day that he plans to restrict gold imports to850 tonnes this year in order to contain the current account deficit (CAD).

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[caption id=“attachment_1037911” align=“alignleft” width=“380”]  Thanks to falling international prices, Indians went on a buying spree which saw consumer demand zoom 71 percent to 310 tonnes, driven by jewellery demand (up 51 percent) and coins and bars (up 116 percent), the World Gold Council reported yesterday.[/caption]

But if one takes the first quarter demand of 310 tonnes out of the 850 tonne limit, the remaining three quarters will have to make do with just 540 tonnes - and there is still the festival and marriage season demand coming up later this year.

This indicates that further curbs will have to come in the months ahead if the 850-tonne limit is to be adhered to.During the first quarter, global demand for gold fell 12 percent to 856.3 tonnes against 974.6 tonnes in the corresponding period last year. But in Indiaconsumer demand for gold in India jumped 71 percent to 310 tonnes, compared with 181.1 tonnes in the year-ago period despite repeated increases in import and excise duties by the government this year.

Goldspot prices plunged more than 25 percent from a closing price of $1,584.70 an ounce on 9 April to a three-year low of $1,180.71 on 28 June.While there has been a recovery since then to the current price of around $1,368 an ounce, the impact of the duty hikes remains nullified.

On Thursday, gold fell 1.1 percent, back from a three-week high, as the dollar rose and US treasury yields hit a two-year high after strong US data bolstered the case for a cut in the US Fed’s bond buying scheme.

On Wednesday, the finance ministry raised custom dutys on gold to 10 percent from the current 8 percent. This is the third increase in import taxes in eight months, yet India’s appetite for gold has not taken a hit.

In fact, the World Gold Council believes thatdemand in India could reach a record 1,000 tonnes this year - having already hit 566.5 tonnes in the first half (January-June period).

“Consumers in India also showed continued strong appetite for gold, with recent government measures to curb demand having had little impact on the quarter’s figures,” added Marcus Grubb, Managing Director, Investment, at the World Gold Council.

The surge in bar and coin investments prompted the Reserve Bank of India to ban their imports. It has also tweaked norms to ensure that importing banks sell gold to jewellers only against full upfront payment.

The consistent demand for gold bars and coins opens the doors for a rejuvenation in illegal imports and black market activities.

In September, a new RBI governor - Raghuram Rajan - will be taking over at the RBI. But for all his free-market thinking, he may just be forced to support further curbs on gold to deter Indians from getting too greedy about the yellow metal.