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Steep price increase in gold and parallel trade destroy demand

Haresh Acharya, Director, Governing Council, IBJA

 

Gold prices in the international markets jumped from around USD 1215 levels on December 15, 2018 to about USD 1315 a troy ounce on January 30, 2019, a jump of about USD 100 per troy ounce or an increase of 8.23%. During the same period, spot gold price in India jumped from Rs. 3154 to Rs. 3319 per gram of 999 fineness (source IBJA daily spot rate), increasing only by 5.23%. Even after accounting for rupee value changes during the period, the increase is only 6.23%.

Why is the Indian gold market in discount?

-          With every price increase, the incentive for smuggling increases. It is estimated that the current discount is about Rs. 500 per 10 gm or 1.5% between gold purchased with cash and purchased through bank. 

-          Scrap or recycle gold flow into the market generally tends to increase with increase in gold price. Thus, as a result of steep increase in gold price, the scrap flow has increased. Scrap includes old gold holdings besides old jewellery.

Impact:

·         Share of organised players in business is shrinking.

·         Marriage and festive season demand for gold is not seen in organised market as it has moved away to parallel market.

·         Government is also a major loser, as it does not get its custom duty and GST on smuggled gold.

Possible solutions:

Government should expedite the announcement of gold policy without any further delay. It is the first and foremost thing that should be done at the earliest.

Second, time is also right for launching “Gold Spot Exchange” on which a lot of work has already been done. All the associations are in agreement. Gold Spot Exchange would push the market towards organised way and would make parallel trade extremely difficult.

On Domestic Council for Gems and Jewellery:

The proposal was mooted towards end of 2016 to have a domestic council for gold. It was appropriate and synergistic with the idea of ‘gold as an asset class’. It is heartening to note that domestic council has taken shape with enlarged scope to cover the entire ‘gems and jewellery’ sector. All the key associations are part of the domestic council. Hope they would come out with specific plans for the sector soon.

Indian silver market:

Like gold, demand for silver is dull. Price increase is one of the reasons. Besides,monsoon rains in the key physical consumption centres of silver- Gujarat, Rajasthan and MP have not been adequate resulting in poor harvest and poor farm income. As a result, demand from rural areas in these states has come down.

Second, industrial demand too has slowed down this year. The share of industrial demand for silver is estimated to have declined from 25% to about 15% in 2018.

Indian dore market:

Import of gold dore into India needs to be organised. Some of the import requirements may have to be aligned with common international practices.

Except for one LBMA accredited refiner, all the other refiners face challenges in sourcing dore. The government should address the issue.

At present, a cess of 0.3% is levied on the import duty of 9.35% on the gold dore imported into the country. Perhaps, MSME Indian refiners certified by BIS/NABL and licensed by DGFT may be exempted from paying the cess (of 0.3%) on import duty.

Government can also instruct large commercial banks to assist these MSME refiners with long term credit lines which would help these refiners while negotiating with large mines located outside the country

 

Disclaimer: Views are personal and not the views of the publisher.