This is unusual and has never happened in last 12 years. Gold prices measured in U.S. dollars have recorded a loss in 2013. Monetary authorities in developed nations slashed interest rates and pumped in huge money by launching stimulus programmes in response to fighting recessions over last few years. As a result, gold prices moved up consistently since 2008. However, Federal Reserve (Fed) in the U.S. has now decided to reduce the pace of stimulus and yields on government treasuries in the U.S. have nearly doubled in last 6-8 months, making yellow metal less attractive. In 2013, gold prices fell off nearly 27% to record their steepest annual fall in last 30 years. But gold in India remained stagnant over 2013 and didn’t see such huge erosion in price. Although depreciation of rupee supported gold prices in India, they have been commanding premium in India even when adjusted for currency fluctuations. There have been supply constraints due to import restrictions which are making gold prices dearer in India as compared to those in other nations where there are no such restrictions.
 

Are you paying more for buying gold in India?

Data as on December 31, 2013
Reflects price trends in the future market
(Source: ACE MF, PersonalFN Research)  

Indian Government had taken a number of steps to curb gold imports as they were the primary source for widening of India’s Current Account Deficit (CAD). It hit a high of 6.7% of GDP in the third quarter of Financial Year (FY) 2012-13. Due to higher import duty and other restrictions discouraging imports of gold, India’s gold imports reduced by nearly 90% in six months through November. But since the CAD fell to 1.2% of GDP in the July-September quarter this fiscal, there has been a growing demand to unwind restrictions imposed earlier.

So far, a few restrictions have been relaxed; which include:
 

• RBI allowed import of gold dore which was banned so far
• RBI has also allowed banks to sanction gold loans upto Rs 1 lakh against jewellery
• Government reduced the base value (tariff value) which is used to calculate custom duties by USD 6 for every 10 grams of gold imported
   

The RBI has already suggested that it might go for more relaxations once the CAD comes down and stays in the comfort zone of the central bank. The demand for lowering import duty on gold from 10% to 8% has been gathering momentum. Since there have been a number of restrictions on gold imports in India; there has been a supply crunch in the system which is making Indian gold command a premium which recently touched a record high of USD 160 per troy ounce. However, the smuggling activity in India has risen substantially. As estimated by the World Gold Council, about 150-200 tonnes of gold smuggled in India during in 2013.

Will government withdraw restrictions on gold imports?
Although CAD is expected to remain under USD 50 billion mark for the current fiscal (which is lower by atleast USD 20 billion than the previous estimates), the Government may not reduce import duties in haste. Lately, Arvind Mayaram, Economic Affairs Secretary, clarified that it is unlikely that the Government would take a call so soon to reverse the import restrictions and would wait atleast till it gets more clarity on CAD. But it remains to be seen whether the actions are in coherence to the statements of Economic Affairs Secretary as we head for elections in mid-April where there could be lobbying for reduction in import duty on gold as well which may be pressed upon to be implemented in the interim budget.

PersonalFN believes, until restrictions on gold imports stay, gold prices in India are likely to command premium over international prices even after adjusting for currency fluctuations. PersonalFN is of the view that, gold is not the asset to make quick gains and should only be treated as a portfolio diversifier. Therefore, irrespective of where gold prices move hereon, investors should continue to allocate 10%-15% of their portfolio to gold. Gold acts as a hedge against inflation in the long term.

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