Gold imports witnessed a significant fall in last quarter of 2011 with rising prices and fall in the value of the Indian rupee. Gold prices have rebounded again in January to coincide with the onset of wedding season in the country, but imports and demand for gold is likely to weaken on increased import duty which would be passed on to the consumers, according to Mr Prithviraj Kothari, President of the Bombay Bullion Association and Director of Riddi Siddhi Bullions Ltd (RSBL).
In an exclusive interview to Sreekumar Raghavan of Commodity Online, Mr Kothari discusses the impact of increased import duty, rising diamond prices, popularity of ETFs and hallmarking for the gold bullion market.
Sreekumar Raghavan: In a year-end analysis published recently, you had projected a positive outlook for gold in 2012 as ongoing Eurozone debt crisis and global uncertainties may boost safe-haven status of gold. The US Fed Reserve’s decision to keep interest rates low and likely bond purchases have stirred up the market again. However, economic data does project some improvements in US economy , apart from progress in Eurozone talks—do you think gold prices could remain a bit subdued for a longer time now?
Prithviraj Kothari: In the middle of September 2011, there was a significant drop in the price of gold, but it has recuperated and gold prices have now become steady. The investors are typically worried about the euro zone debt crisis and the stable drop in the value of Dollar. The cost of silver also suffered a momentary setback but is steadily escalating up now.
Financial brokers and professionals are of the view that gold is back on track after the sudden change of prices in November previous year, when people began selling and liquidating the expensive metal. However, it won’t be acceptable to state that gold costs are moving up. Currently, the economic condition of the market is quite stable and the investors are hoping for the best. They are waiting for the right opportunity to make the right move. However, it must be noted that gold will probably manage to retain its position even if Dollar becomes more powerful. Technical purchase also played a vital role in keeping the value of Dollar stable.
Investors are apprehensive that the debt crisis in Ireland will slowly spread to other areas of the euro zone as well. Under such circumstances, gold seems to be a comparatively safe investment to people, since the economic problem is likely to spread to other parts of the globe very soon. Presently, the position of gold is quite strong. Moreover, the drop in the prices of bonds of the U.S. and German governments has provided people with a reason to invest in gold. A powerful Dollar can splendidly reduce the valuation of gold. Nevertheless, if the debt problems in the euro zone intensify, then the gold as well as the dollar will be safe place for the investors
SK: Indian jewellery and bullion demand ought to pick up from January on the onset of wedding season. Do you expect the hike in import duty on gold and silver and Rupee depreciation to further weaken consumption of precious metals in the country?
PK: Government of India changed the import duty on gold to 2 percent of value from the earlier flat 300 rupees per 10 grams and that of silver to 6 percent of value from 1,500 rupees per kilogram.
Gold has soared this year, with international dollar prices touching a record of $1,920.30 per ounce in early September and Indian domestic prices hitting a peak in early December.
The duty change would translate to about 570 rupees per 10 grams for gold,
The silver import duty could equate to 3,000 rupees per kg at current prices, he added.
This increase in duty would be passed on to the retail consumers by the jewellers as the actual rate of gold itself would increase due to the increase in duty.
Hence in the wedding season to come, I expect a fall in the demand for physical gold and silver. Moreover, the imports are also expected to witness a down fall.
SK: China is emerging as the major consumer of gold and set to displace India to the top position. Do you think investment demand for physical gold is weakening in favour of gold ETFs and futures market in India?
PK: The reason for the spike in Chinese imports in recent months, traders say, is that throughout the supply chain the Chinese gold industry was aggressively building inventory ahead of Lunar New Year, after experience in 2011 when the country ran short. The effect is truly stunning: The 189 tonnes of imports in October and November compares with total imports for the whole of 2009 of just 45 tonnes.
Indian demand, on the other hand, collapsed in the fourth quarter (2011) as a slide in the value of the rupee made gold much more expensive for Indian buyers, already wounded by the slowing domestic economy.
Indian gold imports in the fourth quarter of 2011 tumbled by more than 50 per cent to 125 tonnes.
Put all the numbers together, and they imply that full-year Chinese demand in 2011 was at least 891 tonnes , while Indian demand was just 868 tonnes.
Purchase of Gold ETF's and futures cannot be held responsible for this displacement. Increase in duty, upward moving prices of precious metals and limited source of income for the common man has resulted in a reduced demand for physical gold.
SK: Is the rising demand for diamonds, platinum to impact gold, silver bullion and jewellery demand in India?
PK: Historically, there is a positive relationship between diamond and gold-jewelry demand. Gold is typically used for setting for diamond rings or other diamond objects demand for diamonds is likely to outstrip supply and force diamond prices higher. This could force consumers to look for alternatives, which may also include gold. This is a long-term factor, and we do not expect increased diamond demand to influence gold prices measurably
SK: Do you think hallmarking of gold jewellery will get wider acceptance and be implemented effectively?
PK: The government has taken steps to protect the public from buying adulterated gold; Hallmarking of gold jewelry is one such step. Hallmarking of gold jewelry indicates the accurate finding out and official recording of the proportionate content of precious metals present in gold.
Cases of higher amount of impurities in gold jewellery have been registered lately. To control this discrepancy in the market, the Government has given hallmarking such great importance.
Also, Given the prices of gold, which are skyrocketing, Hallmarking would provide a cushion of assurance to the customers. From the re-selling point of view, Hallmarking is a great move. In future, if customers want to re-sell their Hallamarked gold jewellery, it will become easier
Though hallmarked jewellery will ensure purity, consumers will now have to pay 25% higher making charges
Certified gold ornaments are more expensive as compared with common jewellery.
This development will affect business of small time jewellers owing to fewer hallmarking laboratories in the state. “It may not burden the consumer but will affect livelihood of jewellers in smaller centres,
And given the size of our country, it will take time for proper implementation. For this, there should be awareness among the consumers who would then demand hallmarked gold from their jewellers
SK: What are the expectations of the bullion industry with regard to Union Budget for 2012-13. Is there any specific suggestion you have for the Finance Minister?
PK: Rather than expectation I would like to give a suggestion. Currently the additional import duty has been levied on the invoice. They should levy it on the base price. This will help in improving the current scenario of the bullion industry.
