There’s a glimmer of hope for the goldbugs – the tight rules on imports of the metal into India might be about to change from march onwards.
A week ago I reported on the first survey of the gold market for 2014 from Reuters GFMS which pointed out that the focal point of the global market had moved firmly eastwards as China supplanted India as the world’s biggest buyer of the metal.
But Reuters GFMS pointed out that the political and cultural situation in India should be monitored for signs of an easing in the harsh crackdown on gold imports and purchases launched last year as the rupee plunged in value and threatened to trigger a balance of payments crisis – with soaring gold imports leading the way.
That now seems to have settled with rate rises and other moves from the Reserve Bank of India, and the culmination of an intensive lobbying campaign on the government, dominated by the Congress Party, which is facing increasing pressure ahead of this year’s polls.
Now that pressure has paid off and the Congress Party and leader Sonia Gandhi has backed a relaxation of the tough rules on gold. In reaction the government says it will revisit the situation in March (India’s financial year ends on March 31) to see if the balance of payments situation has improved.
That has been taken to mean the government will make big changes in the 2014-15 national budget.
The news has sort of drifted past a gold market whose concentration has been on the turmoil in emerging markets – South Africa, Turkey, Indonesia, Brazil, and Thailand and Ukraine. India, by comparison, hasn’t featured in the headlines as much as it did in the second half of 2013.
But gold prices have hardly picked up at all with this week’s turmoil and the decision by the Fed to slice another $US10 billion from its quantitative easing spending. In fact by Friday morning, they were down around $US1,247 – down $US19 a ounce on Thursday night and well under where they were around $US1,262 an ounce a week ago.
The news from India has not had any impact – the worries about emerging markets and the impact of Fed’s tightening (for want to a better word) – seem to be of greater importance for the gold market than anything else.
But gold might be firmer than it was in the second half of 2013 – when talk of the Fed starting to start its tapering.
That seemed to spark a price crunch every week or so – and left sentiment is still wary and a bit jumpy. So that’s why good news and developments in India and China will have an impact on this confidence.
India is seen as the one to watch because of the increasing possibility of positive news this year.
For that reason this week’s comments from India’s finance minister, Palaniappan Chidambaram, are seen as a possible first step in improving sentiment.
“In the long term, policy repression is not the solution. We have to look at a way to increase our exports and earn foreign currency to pay for our imports,” the finance minister said in a speech. “We will relax the curbs only when we are absolutely sure that we have a firm grip on the current account deficit and the balance of payments situation.”
Given what central bank governor, Raghuram Rajan, said in Tuesday’s monetary policy statement about the current account (after yet another rate rise), India could be in a position relax restrictions on gold imports in the coming months.
Rajan now expects a current account deficit of under 2.5% of GDP for the current financial year, down from 4.8% in the previous 12-month period.
But analysts in India point out that much of that improvement could be quickly undone by any relaxation of the gold import restrictions. So a small, but gradual unwinding might be the best the market can hope for.
According to analysts at ANZ in India, a fall in gold imports was responsible for 70% of the $US16.6 billion fall in India’s current account deficit in the final months of 2013.
The Financial Times reports that local media reports say the defacto leader of the ruling Congress Party, Sonia Gandhi recently wrote to the Department of Commerce requesting some help for jewellery exporters who have taken the brunt of the import restrictions.
"In effect, she is making a plea to reduce import duties, which have been hiked gradually over the past year to a record 10 per cent, and relax the so-called “80:20 rule”, a quantitative restriction introduced a few months ago which requires importers of gold to re-export 20 per cent of their shipments," the FT reported.
"In particular, it is this second rule that brought a slump in official inflows in India as the government failed to provide clarifications. That was bad news for local jewellers, who ran short of supply but it was a big boon for the domestic economy as imports dropped sharply amid the confusion," the paper added.
But Remember, these are just the official numbers. As Chidambaram admitted on Monday, it is estimated that up to 3 tonnes of gold are being smuggled into India every month at the moment as formal channels have closed up.
One point in favour of easing the restrictions is that the slide in world gold prices could mean the impact on India’s imports will be smaller than a year ago.
But then if the relaxations sees world prices climb in expectation of higher India purchases, that would be a self-defeating move on the part of India.
Last week I reported that Reuters GFMS said surging purchases of jewellery, minted Panda coins and small gold bars helped saw China overtake India as the world’s biggest gold consumer. Chinese demand reached 1,189.8 tonnes last year, up nearly a third (32%) on 2012’s level.
(As an aside, GFMS forecasts an average price for 2014 of $US1,225 a troy ounce, under the current market level and with physical demand remaining solid “but without a repeat of the bargain hunting surge” we saw from China and parts of the developed world at times in 2013.)
China is estimated to have produced around 437 tonnes of gold last year (there are no official figures) and more accurate data will come in the December quarter and 2013 report from the World Gold Council in the next few weeks.
The ‘bargain hunting’ we saw in China last year was driven mainly by the 28% drop in world gold prices. While western investors dumped the metal (Exchange Traded Funds saw an outflow of an estimated 880 tonnes, according to GFMS).
GFMS said the world saw a simultaneous “Asian-led buying frenzy”, with consumers chasing bargains. That in turn saw gold bars being removed from vaults in Europe and other markets, melted into smaller bars in refineries, and shipped to the East. GFMS described the flow as the “largest movement of gold, by value, in history”.
But complicating an accurate global picture was the situation in India where a currency crisis and fears about the economy saw the government bring in an expanding range of tariffs and other restrictions to try and slow the import of gold. Instead, it is reported to have sparked an upturn in gold smuggling from countries like Thailand and from the Middle East (the traditional source for gold smugglers).
As a result, official Indian consumption rose an estimated 5% to 987.2 tonnes last year, but was held back by new import tariffs and restrictions. But the real figure is said to be much higher because of the illegal movement of the metal into the country. In China there were no such restrictions and gold jewellery fabrication rose nearly a third to 724 tonnes, surpassing India for the first time.
GFMS says the centre of gravity in the physical market moved “dramatically eastwards during the middle of 2013 as professional investor disgorged metal, for it to be snapped up by rampant demand in Asia and the Middle East.” This resulted in the largest movement of gold, by value, in history
GFMS suggests that strong physical demand continuing throughout the current year should sustain an average gold price above $US1,200, it does not see any real price growth either. The price could bounce to around $US1,330 an ounce on short covering, but beyond that GFMS reckons the level of interest in the metal will fade, thereby putting a lid on the price.
“With investment activity muted, therefore, gold is likely to show a more traditionally seasonal pattern than has been the case in recent years. This points towards the possibility of brief tests of $1,000 should there be any further investor retreat in the second and quite possibly the third quarters of the year, but physical demand is expected easily to be robust enough to defend any test of this level and any such dips would be short lived,” according GFMS.
GFMS says it sees a gold market more or less in balance during 2014 and this leads it to predict an expected price upturn in the final four months of this year. Overall it thus forecasts an average price of $US1,225/ounce over the full year, 13% below that of 2013.
The other factor to be watched is any signs of a lingering financial tightening in China. Credit seems to be disappearing, judging by the way the central bank has been trying to keep rates down by making injections of liquidity into the country’s money markets.
Any escalation or signs of a prolonged hardening of a credit crunch in China will be very big news for the gold market and other markets, of course.
