Indian gold premiums soar tenfold to $30-40 on import restrictions and shortages

London 31/07/2013 – Premiums on gold sold in India rocketed to $30-40 for 1kg bars over the London spot price, the chairman of the All India Gems and Jewellery Trade Federation told FastMarkets.

The premium is at its highest in living memory, he said, up from a modest $3.50 less than a fortnight ago, driven primarily by recent import restrictions imposed by the government, Haresh Soni said.

The market is suffering from a major shortage, he added, with those who have material hoarding it in the hope of securing even higher premiums in the future.

“Nobody is able to import at the moment,” he said. “It has really shaken up the market.”

“These premiums are just too high – the banks and sellers of the metal are making handsome profits and we don’t feel it is fair to the jewellery makers who, after all, support the Indian economy. They are suffering a lot right now,” he said.

But he played down the possibility of strikes by the country’s jewellery makers, saying that 2012′s disruptions would not be repeated.

The latest moves by the Reserve Bank of India are effectively a step towards an import cap, with the amount of gold allowed to enter the country determined by how much it exports.

By tying gold imports directly to export volumes, the RBI is essentially limiting how much gold can be brought into the country, thus tightening supplies and driving up local prices.

Under the new rules, which became effective immediately, 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.

The sudden nature of the change may have been designed to avoid a flood of purchases in advance of the legislation taking effect – previously, a rush for physical material was seen before the higher import duties came into effect.

The high premiums might result in illegal imports, Soni also said, with an expanding ‘grey market’ benefiting from the widening arbitrage by smuggling in material.

India’s central bank raised the import duty on gold from six percent to eight percent in June after gold imports hit 162 tonnes in May, twice the monthly average of 2011. The bank has also acted to force domestic jewellers to buy metal only on a cash basis rather than on credit.

London spot gold prices were last quoted at $1,328.55/1,329.50 per ounce, up $1.40 on yesterday’s close.

(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