Gold discounts fall as arbitrage window shrinks

World's second biggest bullion market remained at a discount to the global benchmark as purchases across the region were curbed by higher prices

It's 20 days since jewellers ended their 40-day national strike against a new excise duty but the demand for gold has not improved. However, the discounts that were quoted on the prices compared to its cost of import have fallen sharply, from a high of $37.5 an ounce in mid-February and $25 in March to $5 now.

The discount has fallen more as the arbitrage window between the spot market and futures on the Multi Commodity Exchange (MCX) was shrinking, rather than demand coming in. Ajay Kedia, director, Kedia commodities, said: “In the past fortnight, traders were buying gold from the spot market as it was quoted much lower compared to the futures price and selling on the MCX at a higher price. As a result, the MCX price came under pressure, while the discount in spot was getting reduced. It is now only $3.75 an oz.”

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However, buyers are still staying away because prices are still high. On Friday, standard gold closed at Rs 29,555 per 10g at the spot market in Zaveri Bazar here, up Rs 5 from Thursday. Consumers have kept away from buying for two months. In February, this was because there were wide expectation of the import duty being cut in the Union Budget. March was lost in strike.

Says a director of the Indian Bullion and Jewellers Association: “Due to drought, rural demand is almost absent. The marriage season demand, usually from March to early May, is lower at present because of the strike.” If gold prices stay high as at present “even the Akshaya Tritiya demand might be subdued”. The latter occasion, on May 9, is considered a most auspicious occasion to buy gold.