Indian gold prices slump into discount, demand collapses

London 13/09/2013 – Gold physical premiums took a battering this week, pummelled by a flood of recycled supply in India and buyers staying on the sidelines ahead of the US Federal Open Market Committee (FOMC) meeting.

In India, the metal has slumped into a discount as high as $50 to the London spot price from premiums as high as $30 just a fortnight ago.

“This is the first time we have seen such large discounts,” Indian bullion trader Ajay Kumar of Kedia Commodities told FastMarkets.

Since recording such lows, however, others have said that the local price is now much closer to parity, with MKS Geneva trader Bernard Sin saying they have heard talk of such large discounts but that these were not generally available to the market.

“If you want to go to the market now and buy, you couldn’t achieve that,” he said. “It could be one or two isolated cases but our experience is that this is not readily achievable.”

Still, traders are generally in agreement that demand is very weak.

“There is no demand or festivals, the rupee is weak and the volatility in prices has scared off buyers,” he said.

Indian households have also chosen to sell metal, attracted by high local prices, but this extra material has far outstripped demand, Kumar added.

Nevertheless, the premiums are even more significant given that gold imports dropped nearly 90 percent to fewer than three tonnes in August from the same month of last year.

Still, MetalsFocus analyst Nikos Kavalis told FastMarkets that the low August number may be a one-off.

“There was a lot of uncertainty given the recent rule changes, and banks and big importers are unlikely to bring material in in such an environment,” he said.

“The rule changes do imply lower sustainable future official import volumes but August was exceptional because there was no clarity around the rules and so the market was cautious about how to react to the new rules,” he added.

In July, the government also announced that 20 percent of gold imports must be held in customs-bonded warehouses, earmarked for export. Only once 75 percent of that stock is exported – with added value – can more gold be imported.

These measures, alongside previous increased to import duties on gold, are aimed at stemming the country’s current account deficit (CAD). The CAD, the difference between foreign exchange inflow and outflow, hit a record $88.2 billion in the 2012-13 fiscal year, equivalent to around 4.8 percent of its GDP.

The government hopes to bring it down to $70 billion this year via tightening measures including higher import duties on gold – these now stand at 10 percent, having been at four percent at the start of the year.

In London, spot gold prices were last at $1,313.65/1,314.45 per ounce, down $8.85 on the previous session close but more than 5.5 percent lower than a week ago.

But while dollar-priced gold has been relatively weak, a falling rupee took the rupee price to an all-time high of 98,842 rupees per ounce. Relative strength in the Indian currency brought it back to 83,276 rupees per ounce on Friday.

The rupee was last at 63.45 against the dollar, having dropped to an all-time low of 69.22 on August 28.

Weakness in Indian demand has also had knock-on effects for other regions, with Dubai trading at a $2 discount.

“There is nothing happening here,” Emirates NBD analyst Gerry Schubert said. “There is nothing flowing from here to India, and that has really hurt the local market.”

In Shanghai, metal was still at a premium albeit a much lower one than in recent weeks. Traders there put it at $10-15, down from $15-18 previously.

In Singapore, the premium was pegged at about $1, down from $2.50 two weeks ago.

(Editing by Mark Shaw)

Eddie van der Walt

About Eddie van der Walt

London-based, South African-born metals markets reporter, currently focusing on precious metals and the London Metal Exchange. All that glitters must be sold. Twitter: @EvdW