India gold demand not hit by import duty hike

MUMBAI (Commodity Online): At a time when jewellery retailers and gold buyers are crying foul over the increase in import duty on gold and silver, there is a surprise element for jewellery makers which will make them happy.

While presenting the Budget, India's finance minister Pranab Mukherjee said import duty on gold and platinum will go up from Rs 100 to Rs 300 per 10 gm.

However, he also gave some surprise relief to jewellery makers by lowering of basic customs duty on rhodium to 2 per cent from 10 per cent. Rhodium, a precious metal, is needed for polishing jewellery. This will be further aided by the decision to lighten the excise charge on refined gold made from imported ore and concentrate.

Deterred by high prices which led to considerable recycling of gold for jewellery making, India's gold imports fell 19 per cent to 339.8 tonnes in 2009 when China with 454 tonnes became for the first time the world's biggest importer of the precious metal. However, January imports rose to 37 tonnes. Improvement in gold demand has certainly got something to do with the good showing of the economy and the metal price stabilising at around Rs16,400 per 10 gm.

Even though these elements will impact the gold demand a bit, the main price movers will be global investment demand and acquisition or disposal by central banks.

Buying of gold by investors, as the world saw during the heights of the recent economic downturn takes a leap in periods of currency doldrums, particularly of the dollar. The western world, including the UK, has come out of recession but the recovery looks fragile.

Precious metals experts believe that capital will continue to move in assets, including gold where value is likely to stay undiminished through difficult times. Portfolio insurance properties of gold are found to be particularly appealing. China, which is sitting on reserves of $2.4 trillion has acknowledged virtues of accumulating gold by its central bank.

Going a step forward the country is also encouraging its citizens to buy gold. All this is going to give a further boost to China's domestic production of gold.

It has been widely speculated that China would bid for 191.3 tonnes of gold that IMF is selling as the second tranche of the total 403.3 tonnes approved in September 2009.

In the first tranche sale in November, India picked up 200 tonnes, Sri Lanka 10 tonnes and Mauritius 2 tonnes. The gold trade has no problems with voluminous IMF sales since these are not market disruptive. Such sales being off market and accounted for under the central bank gold agreement, they do not represent a net addition to supply.

Experts say China may have some reservation in buying gold from IMF as the institution will make public declaration about the buyer, volume of transaction and contract prices. China's investments in US treasury papers are so enormous that it would not be party to anything which might rock dollar. IMF revelations of any China buying of gold may exactly lead to that.

Whether or not China will be interested in buying IMF gold, it has not left the world in doubt that while it will go on raising domestic gold production, it will also remain a big importer of the metal.