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| Disposal by central banks to be prime mover of gold prices |
| Kunal Bose / Mar 09, 2010, 00:30 IST |
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Protests by importers and jewellers against finance minister Pranab Mukherjee raising customs on gold and platinum by Rs100 to Rs 300 per 10 gm lack conviction. Prices of these precious metals are ruling so high, despite some recent correction that an extra Rs100 per 10 gm levy is not to cause market jitters.
In fact as specific duty rates apply to the two metals, their value appreciation does not automatically enrich the exchequer in the process of imports. This would have been otherwise, had the duty been on ad valorem basis. Gold’s rapid progress triggered migration to silver jewellery buying by the less privileged here and they have reasons to be resentful of the steep hike in import levy on the white metal.
In a move designed to promote the growth of local gold refinery capacity, Mukherjee has moved gold ore and concentrate imports from ad valorem to specific duty. This will be further aided by the decision to lighten the excise charge on refined gold made from imported ore and concentrate. What is a pleasant surprise for jewellery exporters is the lowering of basic customs duty on rhodium to 2 per cent from 10 per cent. Rhodium, a precious metal, is needed for polishing jewellery.
Deterred by high prices which led to considerable recycling of gold for jewellery making, India’s gold imports fell 19 per cent to 339.8 tonnes in 2009 when China with 454 tonnes became for the first time the world’s biggest importer of the precious metal. Are January imports of 37 tonnes, a rise of 10 tonnes over the earlier month, indicative of our appetite for gold rising once again? Improvement in gold demand has certainly got something to do with the good showing of the economy and the metal price stabilising at around Rs16,400 per 10 gm. Indian Bullion Market Association says our gold imports in the current year will be around 550 tonnes.
Amit Kr Sen, director of leading jewellery house BC Sen & Co, says “High prices no doubt prove to be a demand constraint. Surprisingly the enthusiasm of Indian women to acquire gold jewellery is not dimmed. We have been seeing a lot of recycling of gold as demand is made of goldsmiths to make lighter jewellery with new gold.” At the same time the country is seeing resilience in investment and industrial demand for gold.
Global investment demand and acquisition or disposal by central banks will remain prime movers of gold prices. Buying of gold by investors, as the world saw during the heights of the recent economic downturn takes a leap in periods of currency doldrums, particularly of the dollar. The western world, including the UK, has come out of recession but the recovery looks fragile. In this context, Rhona O’Connell, managing director of GFMS Analytics says, “I would not be surprised if we have another wave of interest in gold as investors are bound to be concerned about currency volatility.”
Other precious metals experts believe that capital will continue to move in assets, including gold where value is likely to stay undiminished through difficult times. Portfolio insurance properties of gold are found to be particularly appealing. China, which is sitting on reserves of $2.4 trillion has acknowledged virtues of accumulating gold by its central bank. Going a step forward the country is also encouraging its citizens to buy gold. All this is going to give a further boost to China’s domestic production of gold.
It has been widely speculated that China would bid for 191.3 tonnes of gold that IMF is selling as the second tranche of the total 403.3 tonnes approved in September 2009. In the first tranche sale in November, India picked up 200 tonnes, Sri Lanka 10 tonnes and Mauritius 2 tonnes. The gold trade has no problems with voluminous IMF sales since these are not market disruptive. Such sales being off market and accounted for under the central bank gold agreement, they do not represent a net addition to supply.
Experts say China may have some reservation in buying gold from IMF as the institution will make public declaration about the buyer, volume of transaction and contract prices. China’s investments in US treasury papers are so enormous that it would not be party to anything which might rock dollar. IMF revelations of any China buying of gold may exactly lead to that.
Whether or not China will be interested in buying IMF gold, it has not left the world in doubt that while it will go on raising domestic gold production, it will also remain a big importer of the metal. CEO of World Gold Council Aram Shishmanian says the “Outlook for gold remains positive precisely because of the unique diversity of gold market. Resilient investment demand and progressive improvement in jewellery and industrial demand are part of the picture.” Constrained mine supply also underpins the bullishness of the metal.
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