(Kitco News) - The bad news for the gold market -- India is not importing as much metal as usual during the run-up ahead of the Diwali gift-giving season, analysts said.
The good news - at least strong demand from China is making up for some of the slack. Also, Indians still want gold, as reflected by soaring premiums; they just can't get it easily due to government restrictions, implying that the demand will still be there in future years when or if onerous rules are lifted or pared back.
Gold historically has risen from late summer into year-end as demand for physical metal picks up ahead of a number of gift-giving holidays around the world. In particular, this includes the autumn festival season in India, with Diwali starting on Nov. 3.
This year, however, gold is actually down from where it was as of the end of August.
This is occurring during a backdrop in which authorities in India, historically the world's largest gold-consuming nation, are trying to curtail imports to combat large current-account and trade deficits. The country has hiked the import tariff on gold to 10% and initiated a so-called 80/20 rule that requires importers to export at least 20% of their imports as jewelry.
"It's making it very difficult for anybody to buy gold," said Bernard Sin, global head of precious metals trading with MKS (Switzerland) SA.
On top of this, the deficits have helped pressure the Indian rupee to record lows, making gold more expensive to Indians in their local currency.
"It's clearly having a negative effect on the flow of imports into India, even accounting for some growth in smuggling activity since the imposition of the higher import duties and the 80/20 regulations," said Jeffrey Nichols, managing director of the consultancy American Precious Metals Advisors and senior economic consultant for Rosland Capital.
Gold was the No. 1 imported item by India last year, outranking oil, said Jim Steel, analyst with HSBC. However, as of Monday, an official with the All India Gems & Jewelry Trade Federation was quoted as saying imports were probably only 5 metric tons so far in October.
To put that into perspective, World Gold Council data listed India's demand at 864.2 metric tons for full-year 2012, which would work out to an average of 72 tons a month.
"This now makes China all the more important," Steel said. "China is now by far way out in front as the world's largest gold-consuming country, with India on sort of a hiatus."
And, he continued, China's demand has been strong overall in 2013. It has cooled some in recent months, but this was from "white hot" levels earlier in the year, Steel said.
The Gold Council listed China's 2012 demand at 776.1 tons. The next quarterly World Gold Council report on supply/demand trends may well show China has already exceeded the 2012 tally in just three quarters of 2013, as the combined total for the first two quarters was already 588.9 tons.
"The Chinese have been consistently buying the market," Sin said. "They have been one of the big boys supporting the market, for sure. The last wave of selling that we saw in the market last week was bought by the Chinese. There is still good demand out of Asia. If India was buying as much as the Chinese, the market would have been at $1,400 by now."
Time will tell how long the Indian import restrictions continue.
"I don't think anybody really knows how it's going to unfold," Nichols said. "What we do know is that the Indians love gold, and that's not going away."
Added Steel: "We'll have to see the wider economic climate in India and whether that allows the government to tinker with this. Right now, India is sort of starved of imports."
Indian Gold Premiums Soar On Lack Of Metal
Gold premiums in India have soared as consumers compete to get their hands on a more limited supply, analysts said.
"Premiums are very high," Steel said. "But that doesn't necessarily mean the gold is going in. I'm sure the domestic demand remains strong, but imports have fallen off to very, very low levels."
Analysts reported that gold premiums have been around $100 an ounce ahead of Diwali, reportedly once even getting as high as $140.
"Even with such high premiums, nobody can import," Sin said. "You can see Indians are buying. They're really paying up. It shows they are desperate."
Nichols commented that the gold market has probably already factored into prices the reduced buying from India this year. He also described this as a "temporary" problem.
"Clearly, the Indian people have a strong desire to continue accumulating gold. It has a long history of not only attachment to gold, but smuggling gold. In past decades, there were also periods of restrictions against imports, but they took place nevertheless. I think over time, the smuggling of gold will simply grow to match the demand."
Nichols listed a number of reasons for the affinity to gold in India.
"To some degree, it's a religious and cultural phenomenon that goes back many, many centuries," Nichols explained. Indians consider it "fortuitous" own gold, he continued. Also, those living in rural areas may not have ready access to alternative forms of savings or banking institutions, he continued.
"A majority of the gold purchases is bought by the agrarian sector…not just farmers but the shopkeepers and others who live and work in farming regions," he continued. "When income is up in the agrarian sector, historically we tend to see a rise in imports. And this has been a good year for harvest income for farmers and the agrarian sector in general."
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By Allen Sykora of Kitco News email@example.com