India, the largest consumer of gold until 2010, has been behaving differently since the last quarter of 2011 when imports plummeted due to higher global prices and the increase in import duty and depreciating Indian Rupee.
In an interview to Sreekumar Raghavan of Commodity Online, Mr Mukesh Kothari, Director of Riddi Siddhi Bullions Ltd (RSBL), leading precious metals dealer in India, feels this is perhaps not the right time to buy gold and silver. He comments on the recent import duty hike, government move to discourage gold imports and the charm of investing in silver. Excerpts:
Sreekumar Raghavan:India’s gold imports dropped dramatically in Q4, 2011 and for the whole year while Chinese demand soared. We find several jewelleries opening new branches in the country. But at the same time prices are weakening and demand seems to be falling? At MCX, April gold contract opened the year at Rs 27700 levels and only briefly touched 28400 levels before falling back again? Why is Indian market behaving differently from global trend?
Mukesh Kothari: According to World Gold Council data, Chinese gold consumption totaled 207.4 tonnes in 2003. By 2009 it had more than doubled to 457.7 tonnes. More recently, gold imports from Hong Kong, widely regarded as a proxy for total gold imports, tripled in 2011.
It is possible that the growth in Chinese gold demand could merely represent catch-up, but this seems unlikely given how rapidly China's economy has grown since 2002.
Disposable income has grown at large and more and more people have started saving in gold. Ahead of the Chinese Lunar year, we saw heavy buying of gold. Given factors like rapid development of the Chinese Economy and continued Global uncertainty, I think this trend will continue.
So unless China's development gets completely stuck, its gold consumption should continue to rise over the long run
However in India, we see that there are limited sources of income. Increased inflation is reducing the individual savings power. These reasons have been cited for the declining demand for gold.
The increase in import duty has made situations difficult for the jewelers. Jewelery has become expensive, not only because of increase in bullion prices but also due to increase in import duty. This increase has been passed on the the customer, which is why we have been experiencing a decline in demand even though the number of branches have increased.
Increased duty has also resulted in a fall in gold imports. A depreciating rupee against the dollar has propelled the Indian markets to behave differently compared to international markets.
As gold started correcting post traversing $1,921.15/ounce, spot prices of the metal in India hit a new high (at Rs 29,123/10 gram on November 16), thanks to the fall in rupee. Rupee has corrected very sharply against the US dollar in the last one year. Rupee was at 54.30, down from 45.76 a year earlier, a 18.66 per cent correction. The depreciation in rupee though has made gold purchases costly for Indian investors, the returns for those who held gold in their portfolio last year has magnified.
SK: Silver prices have outperformed gold in the beginning of the year. What could be the reasons for this trend which is visible both in India and abroad? How higher it could go?
MK: Gold is historically the most sought-after precious metal.But there's a reason men like George Soros, Warren Buffett, and Bill Gates are heavily invested in its less-glamorous cousin, silver...Silver is a contrarian play, and it's been blowing gold out of the water. We expect this to continue for a number of reasons; including historic ratios and long-term trends we follow
Silver still hasn’t broken out like gold has, but as I expect that to happen soon. It will break out around the $36 level.
That’s going to happen very quickly because the gold/silver ratio is moving down nicely, but I think it will soon accelerate lower and silver will move a lot faster to the upside than gold. In the Indian markets, if silver crosses the Rs. 61,000 mark then it’s expected to reach Rs. 75,000.
In response to the general positive trend at the global markets, the Indian futures markets have recorded significant gains in the silver price. Silver futures for March delivery climbed 1.28% (close to 700 rupees) to 56,260 rupees per kilo. Market observers expect that the Indian silver price will continue to rise as central banks move towards further stimulus measures.
Lately, we have seen a positive economic growth. Equity markets world over are improving (negligibly though). This improved world economy will pace up industrial growth. And for years we have known that silver is used widely in industries compared to its counterpart gold.
Increased in demand for silver will definitely result in an increase in its price and this trend will continue in the near future.
SK: Is this the right time for investors to buy gold, can we expect a fall in prices soon?
MK: One should wait for some time. I don’t think investing right now will be a good decision because gold and silver prices are expected to touch Rs. 26,000- 26,500and Rs. 51,000-52,000 respectively.
SK: I think you suggested that import duty for gold and silver should be linked to base price. Should it be at the same percentages announced recently or should it be reduced to increase demand?
MK: I feel that a certain percentage should be fixed as import duty linking it to the base price. Govt. can take the month’s opening figure for gold and silver and levy the duty on that particular base price. This will help improve the current market situation for jewelers and bullion dealers.
SK: ASSOCHAM has suggested that India Govt should discourage gold imports and channel the savings of people to productive sectors, what is your view?
MK:Import duty increase and a weakening rupee have led to a loss of forex reserves. Which unless otherwise can be used else whereWith the government increasing import and excise duties on gold and silver, both commodities are set to cost more. The new rates on ad valorem basis – 2% on 10 grams of gold and 6% on one kg of silver – mean that importers will have to pay double the duty.
This is why the government has been asked to discourage gold imports in order to divert forex reserves to other financial instruments that are productive. However, I think that gold imports should definitely be encouraged.
