Indian Buyers Paying up to $150 Per Oz Premium for Gold

October 25, 2013 at 09:26

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Choked-up supplies and festival-season demand are leading Indian gold buyers to pay big margins over its international price to ensure immediate delivery.

Bulk consumers such as jewelers are paying up to $150 a troy ounce over the international price, local traders said, compared with about $3 a year ago and $50 a couple of weeks ago.

India, which imports almost all the gold it consumes, levies a 10% import tax, increasing costs further for local buyers. With that, as well as the sales tax and value-added tax included, gold was selling at 32,000 rupees ($520) per 10 grams, or $1,617 an ounce, Thursday, up about 6% in October. In the international market, by contrast, the price has been steady this month, and was last at around $1,345 an ounce.

The premium that Indian buyers pay is expected to widen further over the next few days, said traders.

Demand peaks around Diwali—the festival of lights, celebrated this year on Nov. 4—because of a Hindu belief that buying gold during the period brings good luck. Demand usually remains strong through December as the wedding season follows the festival period.

Vasu Acharya, director of Parker Bullions, said gold wasn’t available even at higher premiums. Ketan Shroff, director of Penta Gold Pvt. Ltd., a Mumbai-based bullion dealer, agreed.

“Our business has completely dried up this Diwali,” he said. “The reason is there is no supply,” he said.

Jewelers said the supply squeeze is affecting smaller players more because they usually replenish their stocks on short notice depending on demand.

“We don’t know how we will celebrate Diwali this year,” said Ashish Pethe, a partner of Waman Hari Pethe Jewellers.

The shortage of gold follows measures aimed at curbing its consumption and so narrow India’s trade and current-account deficits. India, the world’s largest consumer and net importer of gold, imported about 560 metric tons in the first six months of 2013, according to the World Gold Council.

The measures include an increase in the tax on gold imports to 10% from 6%, and a central bank requirement starting in July that importers ensure that 20% of the gold they import is exported after adding value, such as by being made into jewelry.

Most banks and trading agencies that import gold stopped taking delivery and placing new orders as they were unsure of how to meet the rule. The value of gold imports in September was down 82% to $800 million, helping narrow India’s trade deficit to a 30-month low, but also leading to the current shortage.

The government has since assured importers that it would remove any procedural issues so supplies improve during the festival period—but traders say this has largely proved to be a hollow promise. Industry executives said customs officials have cleared about 2.3 tons of gold in the past month in Mumbai, the country’s biggest gold-trading hub. However, about half that was for jewelry exporters, so it hasn’t done much to improve local supplies.

Some importers said they haven’t made any fresh orders in the past few months due to the change in rules, and are now focusing on selling what they have on hand.

“Once we exhaust our stock, we will close,” said Puneet Kapoor, executive vice president of Kotak Mahindra Bank.