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Modi the new hope for gold, but may disappoint

LiveMint logoLiveMint 21-05-2014 Clyde Russell

Launceston, Australia: Gold bulls tend to flit from one thing to the next in their search for a reason for the precious metal to rally, with the latest hope being Narendra Modi’s victory in the Lok Sabha elections.

The reasoning appears solid enough. Modi’s pro-business the Bharatiya Janata Party (BJP) is likely to roll back some of the tough measures taken by the UPA government to curtail gold imports as part of efforts to lower India’s current account deficit.

Gold is India’s second-biggest import by value behind crude oil, and the UPA government progressively raised the import duty to 10% and imposed the rule that 20% of gold shipped in must be re-exported as jewellery.

These measures, which gold bulls had largely dismissed as irrelevant to the Indian demand, served to crunch imports, which started dropping sharply from the third quarter of last year.

Indian demand fell by 26%t to 190.3 tonnes in the first quarter of 2014 from the same period a year earlier, according to data from the World Gold Council (WGC).

This followed falls of 16% in the fourth quarter of 2013 and 32% in the third quarter of last year, declines which saw India lose its status as the world’s top gold consumer to China.

One thing the gold bulls may have gotten correct is that Indian demand is still there, and it has just been hit by government intervention.

The key question is how quickly is Modi’s new government likely to lower the import duty or relax the re-export requirement?

While Modi may well be well disposed to the gold sector, he’s likely to be swamped with other priorities at the start of his administration.

He’s also likely to be reluctant to give a signal that it’s “game on” for gold imports again, as he would not want the current account deficit (CAD) to start heading the wrong way once again.

India’s CAD was likely about $35 billion in the fiscal year that ended in March, which is lower than the $88 billion for the previous year, said former finance minister P. Chidambaram on 31 March.

At the current spot gold price of about $1,294 an ounce, each additional 100 tonnes of gold imports adds about $4.56 billion to the CAD.

If the first quarter demand of 190.3 tonnes was maintained through the year, it would take the total demand for the year to about 761.2 tonnes, short of the 900-1,000 tonnes the WGC expects the Indian demand to be in 2014.

Assuming Modi does relax restrictions on bullion and the WGC forecast is met, the impact of additional Indian demand is likely to be felt in the last quarter of 2014.

Even if India’s demand does recover to around 1,000 tonnes in 2014, will that be enough to spark a rally?

China, central bank demand steady

The WGC is expecting demand in top consumer China to be largely steady, at about 1,000-1,100 tonnes.

While this level of demand is no doubt supportive for gold prices, it doesn’t imply a rally in prices.

There are also some concerns about Chinese demand in the WGC quarterly report, which was released on Tuesday.

While jewellery demand in China grew a strong 10% in the first quarter from the same period in 2013, investment in bars and coins slumped 55%, leaving overall demand down to 18%.

It was the third straight decline in investment demand in China, which may be a sign that investors in China are losing patience with gold’s inability to rally, and may be starting to worry that the yellow metal’s next move is to the downside.

Gold has gained 7.3% so far in 2014, reversing some of its 26.4% decline in 2013.

But after reaching its high of $1,391.76 an ounce on 17 March, it has slipped to a close of $1,293.80 on Tuesday, and has traded in a relatively narrow band in the last two months.

Outside of the potential for increased Indian demand, there appear few positive drivers for gold.

The WGC report showed that demand from exchange-traded funds was largely flat in the first quarter, and while this is an improvement from the huge selling seen last year, it’s hardly reason to believe a rally is imminent.

Technology demand, which accounts for about 10% of total consumption, dropped in the first quarter from the same period a year earlier, and the WGC pointed to rising use of alternatives in electronics manufacturing.

Central bank purchases were also down in the first quarter, and appear to have settled in a range either side of 100 tonnes a quarter, a level that wouldn’t provide much price impetus in either direction.

The gold market appears largely in a “wait-and-see” mode, lacking sufficient drivers to move the price.

Increased Indian demand, should the new government allow it, will be a positive, but probably not enough to spark a significant price recovery by itself. Reuters

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