Indian physical premiums shot to eye-watering levels this week as jewellers scrambled for material after the government announced further measures aimed at curbing imports, traders told FastMarkets.
“Mumbai premiums rocketed to $20, and even at that price, there is no guarantee of securing material,” one said.
This is a near quadrupling in premiums, as 1-kg bars were last week reported at $3.50 over the London spot price. Gold loco London was last trading at $1,324.05 per ounce.
The trader added that the level could climb as high as $30 to $40 on the new more-stringent import rules.
The latest moves by the Reserve Bank of India, led by the country’s Finance Minister – Chidambaram Palaniappan – are effectively a step towards an import cap, with the amount of gold brought into the country limited by exports.
By tying gold imports directly to export volumes, it is essentially limiting how much gold can be brought into the country, thus tightening supplies and driving up local prices.
“This has really shaken up the physical market,” MKS Geneva trader Bernard Sin told FastMarkets.
“The language [in the legislation] is very confusing, so there is some panic in the market.”
Under the new rules, which became effective immediately upon announcement on Monday, 20 percent of gold imports must be held in customs-bonded warehouses, earmarked for export.
Only once 75 percent of that stock is exported can more gold be imported. India currently only exports 10 percent of its gold imports.
Sin said that these moves were not unprecedented, and that others like Vietnam had tried it in the past.
“But I am worried that it will become more widespread in Asia, with potential far-reaching consequences for the gold market,” he said.
“But India is a special case, with a large current account deficit, and it still trying to find the sweet spot, so we may well see adjustments to these rules.”
India’s has been running a large current account deficit, and in June reported at 3.6 percent of GDP, with much of this due to the insatiable demand for the yellow metal.
New Delhi raised import duties on the metal from six to eight percent in June, and it has also previously acted to force domestic jewellers to buy on a cash, rather than a credit basis.