In its fight against gold, will govt emerge victorious in 2013?

The government’s efforts to lower gold imports are likely to pay off in 2013.

Gold demand from the Indian jewellery fabrication segment is likely to fall to 322 tonnes in the first half of 2013, from 348 tonnes in the same period of 2012, said Thomson Reuters GFMS.

According to the research house, jewellery fabrication demand in the Indian subcontinent fell 11 percent last year to 624 tonnes, a Reuters report said.

The Indian government has been trying its best curb gold import into the country, which is being blamed for the worsening current account situation.

The country’s current account deficit rose to $272 billion or 5.4 percent of gross domestic product (GDP) by the end of September from $224 billion at the end of June.

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[caption id=“attachment_591623” align=“alignleft” width=“380”]  Gold investment fuelled by negative real interest rates and debt concerns is seen driving prices higher in the first six months of 2013. Reuters[/caption]

The gap is the widest in absolute terms since 1949 and has weakened the rupee and exposed the economy to costlier imports.

The situation has also brought back memories of the 1991 crisis, when forex reserves dipped to low forcing the government to airlift its gold reserves to pledge with the International Monetary Fund for a loan.

Terming the present deficit situation “worrying”, Finance Minister P. Chidambaram recently hinted at cutting gold imports to bolster weak external accounts that have brought back memories of a 1991 currency crisis

There are speculation that the government is likely to raise import duty likely on the yellow metal by 2 percentage points to 6 percent in the Budget for 2013-14.

Thomson Reuters GFMS, however, expects gold prices to rise to a record average high this year due to persistent concerns over the health of the US economy and pressure on the dollar. It sees the metal’s 12-year bull run topping out late in the year.

Gold investment fuelled by negative real interest rates and debt concerns is seen driving prices higher in the first six months of 2013, it said, offsetting a dip in jewellery demand and a rise in mine and scrap supply.

GFMS forecasts that gold prices will average $1,775 an ounce in the first half of 2013, up from an average $1,685 in the second half of 2012, and well above the previous half-yearly record average of $1,693 set in the last six months of 2011.

It expects gold to average $1,847 an ounce in the full year, but monthly forecasts suggest it will peak in late 2013. Prices are expected to remain extremely elevated in the first half of 2014.

The company is forecasting a surge in implied net investment, which covers activity in exchange-traded funds, futures and over-the-counter trading, in the next six months to 152 tonnes, against 59 tonnes in the first half of last year.

That is likely to balance a projected 4.2 percent, or 40 tonne, drop in jewellery offtake, a 20 tonne rise in mine output and a 57 tonne increase in scrap supply.

“I think we could see investment in a number of arenas, and at a higher set of prices,” GFMS’ head of research Philip Klapwijk said. “Commentary on the dollar/euro has shifted in recent months from being very bearish on the euro. We don’t see much scope for dollar appreciation this year.”

“We are also expecting the Fed will continue with its asset purchase programmes, and that we won’t see these cease in 2013,” he added. “We think the U.S. economic performance will disappoint this year.”

Implied net investment more than tripled last year, GFMS estimated, to 354 tonnes from 104 tonnes in 2011, picking up the slack after physical bar investment fell by a fifth to 961 tonnes. Jewellery buying, the largest demand segment, fell 4.4 percent to 1,885 tonnes.

Global coin minting is forecast to have dropped to a four-year low of 199 tonnes, down 19 percent from the previous year.

With inputs from Reuters