The Indian consumer’s insatiable appetite for gold and the country’s burgeoning current account deficit (CAD) prompted the Reserve Bank of India (RBI) to further tighten gold import norms late Monday evening. According to the latest norms, an entity importing 100 kg of gold to be kept in a bonded warehouse, for example, would have to release 20 kg to exporters (gold/gold jewellery), against an undertaking to Customs authorities. The new policy would be applicable to gold imports in any form/purity, including gold coins, reports suggest. At the global level, persistent worries over the US Federal Reserve’s plan to wind down its monetary stimulus saw gold prices fall to $1,200 an ounce (oz) in June. So, what do the recent measures mean for investors and would these have a meaningful impact on the gold price trajectory? And, what should be your investment strategy? “The main aim of RBI, through this recent measure, is to restrict import, limit all gold coin and other transactions through jewellery shops only and prevent banks and non-banking financial companies from entering this arena. The move is likely to generate more interest in refining from scrap gold, which is available in a huge quantity in India,” said C P Krishnan, whole-time director, Geojit Comtrade. “As regards key levels, the yellow metal will find resistance around $1,350/oz levels (current price: $1,334/oz). I expect the prices to scale back and one can enter at sub-$1,300/oz levels. The medium- to long-term trajectory will depend on how the US Federal Reserve’s plans for quantitative easing withdrawal play out. I don’t expect prices to gallop from here on. They will remain in a trading range of $1,250-1,350/oz,” he adds. Shriram Pitre, senior vice-president and head of commodity and currency research at Anand Rathi Commodities, says, “We believe the latest move by RBI is aimed at discouraging imports further, while at the same time, encouraging exports. One of the key developments was that all nominated banks/agencies will have to ensure at least a fifth of every lot of imports of gold is exclusively made available for exports. With most of the gold imported into the country used for domestic consumption purposes, we expect supplies of gold to be impacted due to this move in the months ahead.
This, in turn, is likely to increase premiums on gold, and thereby make the metal more expensive in the domestic market.” “The rupee’s depreciation against the dollar has also proved to be a problem. Those importing gold are not able to hedge their positions in the currency futures market, and hence the volatility. We recommend short-term investors to buy gold on any dip towards Rs 27,200-27,000/10g and expect a target of Rs 28,200-28,500 in the next couple of months. From a 6-12 month perspective, however, we are not that optimistic on gold, as we expect investment demand for the metal to remain weak,” he adds. Philip Poole, global head of macro and investment strategy, HSBC Global Asset Management, suggests gold prices have corrected in the recent past partly because Indian authorities have put curbs on imports. “Central banks across the globe, especially in Cyprus, had started selling their gold holdings earlier. More importantly, it is weaker because the big-picture risks considered problematic in 2012 (break-up of the Euro zone, the US fiscal cliff) have become less problematic now. If treasury yields start to move up, gold prices could trend down. However, they will find trading range equilibrium around the current levels. I don’t expect a dramatic fall from these levels,” he says. In a report in May, Tom Kendall, Ric Deverell and David Sneddon of Credit Suisse had suggested the price of the yellow metal was much higher than the historical mean. “In real terms (current dollars, adjusted for US consumer price inflation) the average price of gold over the very long run (150 years) is around $520/oz. Even bringing the period forward to 1971 onwards (i.e., since the end of Bretton Woods/fixed gold price) only lifts that average to $780/oz (real, current dollars).”