Indian Gold Demand Fell by Half Ahead of Diwali

November 5, 2013 at 10:48

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Indians bought around half the gold they usually buy in the run-up to Diwali this year, according to sellers of the precious metal, citing reduced availability as a result of measures aimed at curbing imports and higher prices in India compared with gold on the international market.

The festival of lights, as Diwali is known, is the biggest gold-buying occasion in India, the world’s largest gold consumer. Government efforts to reduce imports by substantially increasing the import tax—to 10% now from 2% in January last year—and introducing a rule that requires importers to re-export 20% of all gold that they bring into the country seem to have been successful. But that isn’t the way retailers see it.

“This Diwali was a disaster. I have never seen such bad festival sales in 20 years,” said Rajiv Popley, director at Popley & Sons, which operates a jewelry chain. “Even those customers who wanted to buy gold coins couldn’t find any stocks due to supply restrictions.”

Finance Minister Palaniappan Chidambaram on Friday justified the gold import restrictions, saying they would help contain the country’s current-account deficit to around $60 billion compared with an earlier estimate of $70 billion. The government took aim at gold because most of the metal the country consumes—around 1,000 tons a year, equivalent to more than $40 billion at prevailing international prices—is imported.

Harmesh Arora, a spokesman for the Bombay Bullion Association, which represents the interests of traders and jewelers, said gold sales ahead of Diwali, which was celebrated on Sunday in India, were 50%-60% of last year’s level. Usually, gold sales in the period total around 70-80 metric tons. Mr. Arora didn’t provide an estimate in tons for this year.

“Sales picked up only a couple of days before Diwali,” he said. “But it was nowhere enough to match up with last year’s level.”

Most consumers made only token purchases in keeping with an age-old religious belief that it is auspicious to buy gold and silver during Diwali, he said. “This year, a consumer who would have normally bought 100 grams, cut down their purchase to no more than 20-30 grams.”

Reduced import commitments by banks led to reduced availability of gold in markets, which has pushed the premium to international prices to around $100-$130 a troy ounce from $2-$3/oz at this time last year.

“This time there were no stocks available,” said Haresh Soni, chairman of the All India Gem and Jewellery Trade Federation. “There was also spending tightness due to overall liquidity crunch.”

Retailers said they have been allocating more of their stocks to gold jewelry, which provides better margins than bullion bars or coins.

Gold coins embossed with images of Hindu gods, as well as bullion bars, usually see brisk sales during the festival season.

International gold prices have drifted lower throughout the year. Spot gold is currently trading around $1,315/oz, below the $1,335 level that it fell to when it took one of its biggest-ever tumbles in mid-April, and down 22% in the year to date.

While part of the reason for the April dive was panic over news that Cyprus might be forced to sell its gold to fund its bailout, declining Asian demand was also a factor.

Weak Indian gold purchases at a time of traditionally strong demand may further erode the precious metal’s prices in the face of expectations that the U.S. Federal Reserve will soon start to taper its bond-buying program, which has over the past couple of years infused liquidity in markets, boosting prices of some commodities, including gold.

Fund managers have looked to gold as a haven in times of economic uncertainty, but recently stronger U.S. economic indicators are encouraging more investments in riskier assets, such as equities.

Stronger demand for physical gold can provide price support, as happened in April, when Asian bargain buyers snapped up the metal, helping to put a floor on prices.

Indian traders had been anticipating good buying during this festival season, which started in late September, as a bumper summer harvest boosted earnings for farmers—a segment that accounts for about 70% of the country’s gold demand.