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ANALYSIS - Gold exports ooze from India, world's biggest buyer

MUMBAI (Reuters) - India, normally the world’s top gold importer, may have turned net exporter in the last few months as Indians melt down their jewellery to catch high prices.

Gold bangles are seen inside a display case at a jewellery shop in Singapore in this March 7, 2008 file photo. REUTERS/Vivek Prakash/Files

India imported no gold at all in February for the first time, and traders say it probably won’t again in March.

In fact, gold now appears to be seeping out of India in the form of gold coins, which allow big traders to skirt restrictions on exports, a trend that underscores the resistance to spot gold prices challenging last year’s all-time $1,030.80 high.

“In February and March many people have exported gold...about 6 tonnes may have gone out,” said a senior member of a large trade association in Mumbai’s gold hub Zaveri Bazaar.

As Indian prices fell below global rates, an arbitrage opened for traders stuck with high stocks in a domestic market awash with gold as scrap sales surged as much as four-fold.

“We exported 100 kgs for the first time last was just enough to make a small profit,” the head of a large trading house in New Delhi said.

The dramatic reversal in gold trade partly explained why world prices have been stuck at below $950 an ounce for the past month, despite continued heavy investment in exchange traded funds (ETFs) and several bouts of risk aversion.

It may also pinpoint the pain threshold for Indian consumers, as well as the potential for changing retail behaviour in a rapidly developing economy -- one that may be increasingly sensitive to high prices as the world battles recession.

“There has been some degree of change in taste, both in terms of what kind of jewellery people want to buy and also changes in consumer spending priorities, with other things starting to feature on people’s wish list,” said Philip Klapwijk, chairman of the London-based research firm GFMS Ltd.

In 2008 gold imports had almost halved to 396 tonnes, the lower end of typical annual imports of 400-800 that have prevailed even as population and incomes rose steadily.


The Reserve Bank of India restricts the trade of bullion to prevent it from affecting the partially convertible rupee, but value-added gold, such as jewellery or coins, can be exported.

Though the exports do not evade the government’s rules, there is secrecy surrounding them because the gold coins would be used by the buyer as bullion, what the government wants to avoid.

“This is not a normal sale -- it is a disguised arrangement (to export bullion),” analyst Nayan Pansare, who works with jewellery export houses, said. “Most of the coins that are being exported would most likely get melted and turned into another form, possibly jewellery.”

The motive is simple: profit.

The discount for Indian gold futures versus spot global prices widened to 500 rupees ($10) per 10 grams when gold struck an all-time high of 16,040 rupees ($317) per 10 grams on Feb. 20, well above the 150 rupees gap that makes exports viable.

On Thursday, the local market had a discount of 100 rupees over the foreign prices with the April contract on the MCX trading at 15,230 rupees ($300) .

“When the market is at a discount, you can see exports,” says independent analyst Bhargav Vaidya.


Indians, whose culture encourages them to put their savings into gold, are being put off by soaring prices and a slowing economy, while the metal has also slipped down the list of priorities.

The rupee currency has depreciated against the dollar sufficiently to push local gold futures to a domestic record high last month of 16,040 rupees even though the global spot price is around 10 percent off its record of $1,030.80 an ounce hit a year ago.

Economic growth of 5.3 percent in the December quarter was India’s slowest since the March quarter of 2003. While the country is far from recession, analysts say growth is grinding down to a level that threatens jobs and more poverty.

“The next two years will be a difficult period for the economy,” said Pansare. “There will be nervousness and there may not be a big increase in gold demand.”

As urbanisation gathers pace, gold has also been pushed down the shopping-lists of some middle class Indians in favour of real estate or appliances like air-conditioners and washing machines.


Droves of Indians rushed to profit from the high price by taking trinkets to gold shops for sale, giving a dramatic fillip to the trade in scraps.

“As against a normal scrap sale of 2 kgs a day, about 7-8 kgs have been coming,” said Jitendra Kantilal, a partner at a large Mumbai trader, Jugraj Kantilal & Co, which melts gold scrap into bars for sale to the market.

But even if the trade in scrap has temporarily met demand, that situation will not persist for long, industry officials say.

“India’s gold demand is very price elastic, but traditionally purchases are put off to another day, not for good, and I find it hard to believe they will become long term sellers,” said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.

Others also see a base level of demand that will need to be satisfied.

“Only a small amount of recycled gold is coming into the market, it is not enough to meet all of India’s gold demand,” senior BBA official Harmesh Arora said, who said India could still import 400 tonnes this year.

Analysts said a drop below $900 an ounce could restart gold imports, but only a dramatic fall could see gold imports recover to 800 tonnes or more.

Additional reporting by Siddesh Mayenkar and by Nick Trevethan in SINGAPORE