Gold premiums in India advance to record as shortage widens

Gold premiums in India, the world’s largest user, climbed to a record as jewelers rushed to secure supplies to meet soaring demand during festivals and weddings amid government curbs on imports.

The fees paid by jewelers to banks and other importers climbed to as much as $120 an ounce over the London price this week compared with a discount of $60 a month earlier, said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation. Premiums may surge to $150 to $200 if the shortage persists, he said.

The raw material scarcity is worsening as imports slumped after the government linked shipments to re-exports in July and increased tax on overseas purchases for a third time this year to curtail demand. Purchases of gold and silver tumbled to $800 million last month from $4.6 billion a year earlier, the Commerce Ministry said Oct. 9.

“There is a shortage in the market and there will be panic in the market with each passing day” if supplies don’t increase, Bamalwa said. “The government is comfortable because import of gold is reduced but it’s a problem for consumers. Gold is in our culture and we can’t change that.”

The Reserve Bank of India on July 22 made it mandatory for importers to set aside 20% for re-export as jewelry, almost halting imports by traders and banks. Inbound shipments may be less than 150 metric tons in the second half because of higher tariffs and restrictions compared with 478 tons during the same period a year earlier, Bamalwa said.

Gifting Gold

Premiums are increasing as jewelers prepare to meet traditional household demand for ornaments during the peak wedding season starting next month and festivals, said Vinod Hayagriv, managing director of C. Krishniah Chetty & Sons.

Buying and gifting gold in India is considered auspicious during festivals and weddings. The festivals run from August to November followed by the wedding season through early May.

Gold for immediate delivery in London fell 21% this year to $1,327.78 an ounce today. Futures on the Multi Commodity Exchange of India Ltd. was at 29,916 rupees ($488) per 10 grams, 15% below the record 35,074 rupees on Aug. 28.

Imports probably totaled 5 tons so far this month compared with an estimated demand of about 100 tons, Bamalwa said. “Smuggling is rising as one kilogram of gold bar is equivalent to the size of an i-phone and it gives a profit of 500,000 rupees,” he said.

Record Deficit

The government plans to keep imports to 800 tons in the financial year ending March 31 from 845 tons a year earlier, Economic Affairs Secretary Arvind Mayaram said on Oct. 1. Prime Minister Manmohan Singh tightened curbs on imports after increasing demand helped to widen the nation’s current-account deficit to a record and pushed down the rupee.

The rupee tumbled to a record 68.845 against the dollar on Aug. 28 and was at 61.65 today. The deficit widened to $21.8 billion in April through June from $18.1 billion in the previous quarter, the central bank said Sept. 30. The gap was a record $87.8 billion in the year ended March 31.

Consumption in India, which ships in almost all the bullion it uses, accounted for 20% of global demand in 2012, according to the World Gold Council.

“We are very much short of authentic gold which is not smuggled,” Hayagriv said. “You don’t know who are you going to be forced to buy from. There is going to be a great shortage.”

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