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Plunging prices, incredible imports: India's gold lust insatiable

Kishori Gopalkrishnan in Bombay

While the price of gold has dropped to record levels not seen in the past 12 years, the country's demand for gold, already the highest in the world, has risen remarkably to a record 189.8 tonnes in the third quarter of this year, a phenomenal increase of 58 per cent over the corresponding period last year, World Gold Council has declared in a report released in Bombay recently.

The third quarter demand showed an increase of four per cent from the second quarter figure of 181.9 tonnes. Total demand for the last nine months was 535 tonnes, which was ahead of the yearly demand of 507.8 tonnes during 1996, according to the WGC report.

The sudden spurt in demand follows the government's announcement to allow 10 nationalised banks and many authorised agencies to import unlimited quantity of gold under the Open General Licence scheme at an import duty of five per cent and to sell it in the local market. Banks like the Indian Overseas Bank have started importing gold under the liberalised rules.

Another reason for the increased imports is the government's decision to allow non-resident Indians to import 10 kg of gold individually.

The WGC report indicates that this would narrow down the gap between international and domestic gold prices, resulting in more inflow of the yellow metal. A fall in global prices (it was quoted at $292 per ounce on Wednesday, while last week it was $300 per ounce) has also come as a shot in the arm, the report adds.

Import of gold through official channels has also risen. In the first nine months, 136.3 tonnes of gold was brought in as against 68.3 tonnes in the corresponding period last year.

However, the increased imports has put pressure on prices in the Bombay bullion market, which on Wednesday reached a low of Rs 4005 per 10 grams. But bullion traders in Bombay lamented that sales have yet to pick despite the record low prices.

India continues to remain the largest market for gold. Till the mid-80s, gold smuggling was rampant in the country especially along the western coast which was closer to the Gulf-based smuggling chains which used the marine route for illegal landings.

Following the P V Narasimha Rao government's decision to liberalise the economy, controls on gold imports were lifted. In 1992, a person having spent a minimum of six months abroad could bring in up to 5 kg gold. This move curbed gold smuggling to a great extent. On January 1, 1997, the import ceiling was upgraded to 10 kgs for an incoming passenger.

Traders now maintain that with illegal avenues like coastal landings too risky to use, gold smugglers are utilising carriers to bring in gold through the legal channel. However, the necessity of a minimum six-month stay abroad to be eligible limits the number of carriers while the maximum quantity of 10 kg curbs the quantity that can be brought in.

Traders added that gold offloaded by some major international banks over the past six months could also find its way into the hands of gold syndicates leading to an increase in smuggling. A number of foreign banks, especially in Europe and Australia, have offloaded their gold stocks which are no longer considered worth hoarding.

In an earlier report, the WGC had pointed out that lifting the restrictions on gold imports by India will affect Dubai's gold trade. "The easing of import in India may have a long-term impact on Dubai gold trade though it may not have any short-term or medium-term impact,'' said Rolf Schnebeli, chief executive officer, Middle East and India, WGC.

He pointed out that gold in Dubai was still about 10 per cent cheaper and even if authorised agents are allowed to freely import the metal, there will be six to eight per cent price advantage for Dubai which will enable the city to remain the regional hub of gold trade.

Dubai will remain a major centre for gold trade as the authorised Indian agencies may make bulk purchases of gold from Dubai, still the cheapest and nearest source for gold, traders said. They felt with five per cent duty and other handling charges, Indian imports will still be costlier. However, if the price difference of gold in Dubai and India narrows further it will eliminate gold smuggling and hawala (illegal) trade, they felt.

In the first nine months (January-September) of 1997, gold imports to Dubai had touched a new high of 473 tonnes against 254 tonnes during the same period last year, an awesome 86 per cent increase. ``More than 70 per cent of this has come to India, but the offtake has not picked up to the extent expected,'' lamented a leading dealer in Bombay.

However, this might change. Some traders point out that with the economic slowdown and speculators having a free run in the stock exchanges, gold has stepped in as an alternative for small and medium investors.

They traders point out that a sure index of growing investment in gold is the sudden rise in legal imports. As compared to the about 290 tonnes gold imported by non-resident Indians and through the Special Import Licence route last year, the corresponding import up to September this year was 340 tonnes. At this rate, NRI and SIL import will be about 500 tonne by the year-end, sources said.

More important, the quantum of gold imported legally and illegally by India is proportionate to the gold imported by the United Arab Emirates. Sources have pointed out that 85 per cent of gold imported by Dubai is destined for India. For instance, in 1995 India swallowed through legal routes about 255 tonnes of the 317 tonnes imported by Dubai in 1995. A large chunk was also smuggled into the country. Similarly, last year, 290 tonnes out of Dubai's 350 was eaten up by India.

While recent gold seizures in Delhi, Bombay and other international airports indicate that the airport route still remains attractive, traders said that Nepal has emerged as a major base for Dubai-based gold syndicates to smuggle the yellow metal into India through the extremely porous border.

Meanwhile, gold prices continued with its downtrend in the Bombay bullion market with prices on December 3 touching Rs 4005 per 10 grams. Last week, the yellow metal hit another low of Rs 4020, at which level it froze due to the traders strike.

Two reasons have been attributed for the price fall. A dramatic drop in the world gold prices (on December 3, it was $292 per ounce, a 12-year low in the London market) has forced Indian stockists to sell, pushing prices down. Also, the persistent fall of the rupee against the dollar has increased the supply of gold, which has not been matched by offtake. Despaired a bullion dealer: "Though the marriage season is round the corner, purchases are few as consumers are waiting for the prices to fall further.''

While standard gold hit Rs 4005 and threatened to dip below the Rs-4000 mark, 22-carat gold was nominally quoted lower at Rs 3,705 from the previous Rs 3,720. And the ten-tola gold bar of .999 purity dropped well below the Rs 47,00 level to touch Rs 46,900.

Traders said the likelihood of foreign central banks selling or lending gold reserves, thus boosting supply, had made the market sentiment overwhelmingly bearish about gold's price.

"There is a lot of selling by hedge and commodity funds out of New York. They have accumulated big short positions," one trader said.

Analysts point out that central banks are offloading gold because they can earn better returns putting their assets in other investments such as bonds. And they have been releasing their gold into the market.

On November 12, Germany's central bank, the Bundesbank, said it was lending gold. On October 12, a Swiss committee proposed that Switzerland's central bank sell 1,400 tonnes of its gold, which sent prices skidding to $307.50 on October 27. And in July, when Australia said it had sold 167 tonnes of gold reserves, gold had dropped to $313.60 per ounce.

The previous low for gold was in 1985 when the price sank to $285, a level that appears within reach now. Another bearish factor has been the financial turmoil in Asia.

Moreover, the recent stock markets and currencies turmoil in Asia the region led many people to sell their gold. The Asian currencies devaluation -- some weakening by over 30 percent against the US dollar -- has made gold, priced in dollars, more expensive. Last year, Asia accounted for 50 percent of the world's gold demand.

Gold historically was seen as a safe investment because it retained its value during troubled economic and political times. But gold's price made only small gains when steep declines rocked the world's stock markets recently.

"Gold does not seem to be a safe haven any more," a trader said, adding he expected a further decline in the price. "I think gold will move lower in the short term -- maybe to $285."