India gold premiums jump, bargain hunting props up China demand

By Sethuraman N R and Rajendra Jadhav

BENGALURU/MUMBAI (Reuters) - Gold premiums in India jumped to their highest in 21 months, as demand surged after the government abolished two high-value currency notes, while bargain hunting propped up demand and premiums in leading consumer China.

Indian government on Tuesday abolished 500 and 1,000 rupee banknotes to crack down on rampant corruption and counterfeit currency. The surprise move started disrupting cash-based gold smuggling.

After the government announcement, some people with unaccounted wealth paid as much as 50,000 rupees for 10 grams gold, compared to official price of around 30,000 rupees, traders said.

For most of 2016, gold traded at a discount in India as smugglers undercut official importers.

Dealers in the world's No.2 consumer of the metal were charging a premium of up to $6 an ounce this week over official domestic prices that include a 10 percent import tax, the highest since mid-February 2015. Last week, they were offering a discount of $3 an ounce.

"The ban on high-value notes has disrupted smuggling network. Demand is shifting to banks and refiners," said Daman Prakash Rathod, a director at MNC Bullion, a wholesaler in Chennai.

In the long run, India's physical demand could take a hit as unaccounted money gets parked into mostly gold and real estate, said Hareesh V, research head, Geofin Comtrade Ltd.

Meanwhile, China saw good demand as prices fell, pushing premiums up to $5 from $4 last week against the international benchmark.

Gold prices were on track to end this week lower for the first time in four weeks. Spot gold is set to end the week down over 3 percent.

"People were expecting gold to go up after the U.S. election results but it did not last long ... More and more would rather wait on the sidelines until a notable trend can be observed," said Samson Li, an analyst with Thomson Reuters-owned metals consultancy GFMS.

Gold surged by nearly 5 percent on Wednesday after Republican nominee Donald Trump triumphed over Democrat Hillary Clinton in the U.S. presidential election, a surprise for markets, prompting investors to seek refuge in perceived safe-haven assets like gold. Prices later tumbled as U.S. markets reacted positively to the Trump win.

"Whenever there was a dip, people (in China) were buying," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong.

In Hong Kong, sellers were offering a premium of 50 to 70 cents an ounce, while in Singapore premiums were unchanged at 80 cents.

Demand in Japanese markets continued to remain tepid with premiums flat to a discount of 10 cents.

(Reporting By Nallur Sethuraman in Bengaluru and Rajendra Jadhav in Mumbai; Editing by Vyas Mohan)