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Gold Underperforms Due to India Tax Policy

By    |   Thursday, 10 October 2013 04:16 PM

Gold prices could suffer further as restrictions and tax increases on imports of the precious metal in India boost supply elsewhere in the world.

India is the world's biggest gold consumer, accounting for 20 percent of global demand in 2012, according to the World Gold Council. The country imports almost all of its gold.

India's government plans to limit imports to 800 tons in the year ending March 31, down 5 percent from 845 tons a year earlier, said Economic Affairs Secretary Arvind Mayaram, Bloomberg News reports.

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The government's gold restrictions are meant to restrain the country's bulging current account deficit and end the rupee's freefall.

The deficit expanded to $21.8 billion in the second quarter from $18.1 billion in the first. The dollar traded at 61.36 rupees Thursday, down from a record high of 68.85 rupees Aug. 28.

India's gold and silver imports tumbled to $800 million in September from $4.6 billion a year earlier, according to the Commerce Ministry.

Imports have slid since the government connected imports with re-export requirements in July, and that policy may persist, the Finance Ministry says, Bloomberg reports.

The Reserve Bank of India ruled that importers must keep 20 percent of gold imports for re-export as jewelry. The government also has raised the import tax on gold three times this year to keep a lid on demand. The tax now stands at 10 percent, up from 2 percent in January.

All that has nearly put a stop to imports by traders and banks, according to Bloomberg. And lower gold imports in India mean higher supply on other global gold markets, pushing prices down.

Imports will drop to 150 tons maximum in the second half of the year from 478 tons in the 2012 period, because of higher tariffs and restrictions, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, told Bloomberg.

Spot gold has slid 23 percent so far this year, to $1,297.23 an ounce Thursday. That drop has come amid speculation that the Federal Reserve will soon taper its quantitative easing. But the dynamics in India are undoubtedly playing a role, too.

While India's restrictions on gold imports are bearish for the precious metal globally, they have driven up prices internally by creating a scarcity.

Buyers in India are now paying $50 a troy ounce more than the global price, a reversal from just a month ago, when Indian buyers could purchase gold for a small discount, The Wall Street Journal reports.

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At that point Indians were unloading gold in a hurry as the dollar appreciated against the rupee, driving local gold prices near record highs in rupee terms.

Now there's a supply shortfall, right when demand is heating up for festival season. "The demand is very strong, but there is no gold available," Vasu Acharya, director of Parker Bullions, one of India's biggest gold dealers, told The Journal.

Imports are large enough to sate only 10 percent of demand now, he said.

Relates Stories:

India Is Vital to Keeping Gold Price Stable

India's Gold Imports to Resume, Ends 2-Month Impasse

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Gold prices could suffer as restrictions and tax increases on imports of the precious metal in India boost supply elsewhere in the world.
Thursday, 10 October 2013 04:16 PM
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