Will gold continue to bring glad tidings?

The festive season has been an eternal favourite of Indian consumers when it comes to buying gold. And with prices witnessing a marginal decline, it has been really a bonus for gold buyers and gold retailing companies.

Consumers have flocked in big numbers this festival season shopping for gold leading to a 10 to 40 per cent increase in gold sales for retailers across the board.

“Our grammage growth has been in double digits in the last couple of months as there has been a dip in prices. We have seen a double digit growth this year till now as well, as far as grammage is concerned,” Titan jewellery division senior vice president (retail and marketing) Sandeep Kulahalli told Deccan Herald.

South India-based jewellery retailer Kalyan Jewellers, too, agrees that the demand has been good during the festive season. “For us, we have seen a 40 per cent increase in sales compared with last year`s during the festive season,” Kalyan Jewellers chairman and managing director T S Kalyanaraman says. The marginal decline in prices has certainly helped prop up the gold buying sentiment across the country, he adds.

According to the data released by Swiss Customs Administration, gold exports from Switzerland to India so far this year has reached over 11 billion Swiss francs (around Rs 70,000 crore).

 The gold exports from Switzerland to India stood at over 2.2 billion Swiss francs (around Rs 15,000 crore) in September alone, which is double the figure for the previous month. Total Swiss gold exports to India since January this year have grown to 11.4 billion Swiss francs.

So, is this oversupply in the Indian market due to imports from Switzerland and some other countries the real reason for decline of gold prices in the Indian market?
Experts and retailers, however, beg to differ. “International gold prices declined from around $1250 per ounce to around $1150 and that is the reason for the decline. Rise in imports is quite a natural phenomenon during the festive season given the kind of demand that the season generates,” an industry official said.

Disputing some of the data of gold imports released in September-October 2014, the All India Gems and Jewellery Trade Federation (GJF) claimed that the increase in gold imports in September- October 2014 was a normal trend. This increase was stimulated by advance buying before the  festival time and anticipation of additional curbs on gold imports as indicated by the government.

The GJF also pointed out that the comparisons on a year-on-year basis with September-October 2013 were meaningless as there were hardly any gold imports in September-October 2013 due to uncertainty following the imposition of the 80:20 rule (in which 20 per cent of imports have to be exported).

“There is a lot of talk about Swiss gold imports into the country. Premiums and prices have, however, gone up. Even if they have been coming, it may soften very soon. Imports during the festive season are higher but they are not sustainable,” says Titan’s Kulahalli.

Trade data for the month of October has set the government think tank rolling on what the possible measures to control imports could be. According to the October trade data, gold imports jumped 280 per cent to $4.17 billion in the month. Trade deficit for October widened to $13.35 billion as exports reduced 5.04 per cent and gold imports surged. Total imports during the month increased 3.62 per cent to $39.45 billion.

According to reports, the government is considering hiking in import duty of gold which currently stands at 10 per cent. So, is the government justified in hiking import duty, will it actually help curb imports and bring the current account deficit under control?

Smuggling

The GJF believes that gold imports by India are very much within limits and the country can very well afford it. “According a report by former economic advisor C Rangarajan, we cannot afford imports of over $30 billion. The gold imports in 2013 were at around $30 billion itself which means we can certainly afford it,” GJF Director Bachhraj Bamalwa says.

The Federation believes that such a move by the government will only encourage gold smuggling. “The hike of import duty on gold has built a parallel economy, leading to large scale gold smuggling which has increased manifold,” according to GJF vice chairman Manish Jain. The GJF has urged the government to bring down the duty on gold from 10 to 2 per cent as it will make smuggling unprofitable and may even eliminate it besides curbing deployment of black money for this process, Jain adds.

The Indian government can certainly wait till November 30 before announcing any curbs on gold imports. Here’s why: according to a report by HSBC, the people of Switzerland are expected to vote in a referendum on three issues on November 30 including the gold initiative called Save our Swiss Gold.

If accepted by the voters, the referendum would mean:

The Swiss National Bank (SNB) has to hold at least 20 per cent of its total assets in gold
All physical gold held overseas would have to be repatriated, and, The SNB would be forbidden from future sales of gold.

The HSBC goes on to say that the impact on gold of a ‘yes’ vote on the gold market could be notable as it will give bulls a morale boost. The SNB gold holdings stand at about 8 per cent of foreign exchange holdings and an increase to 20 per cent at current forex levels would mean it would have to purchase about 1,500 tonne of gold. This would be enough to significantly impact the market as it would be roughly equivalent to all of China’s gold consumption in 2013. It would also equate to about half of annual global mine output.

The positive vote would mean good news for the Indian government as well, in some sense at least. Gold prices are likely to head higher due to which consumer buying sentiment may take a hit which may lead to lower demand, ultimately leading to lower imports by the country.