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Analysis: Indian gold remains at discount to London; global spot price volatile

https://www.chemnet.com   Jan 26,2015 Platts
Over the past two weeks, the price of physical gold offered in India has been at a discount to the London spot price -- having started the year at a premium -- mainly due to a pickup of the international price, sources said.

Indian gold premiums/discounts are a barometer of the country's physical demand and are priced off the London spot $/oz price.

The premium tends to rise when the spot price comes off, and vice versa.

Premiums ticked up at the start of the year to around $3-6/oz, and then quickly flipped to a discount.

On January 12, Platts assessed the India-wide discount at $2/oz below London spot.

The Indian discount to gold fluctuated from zero to $4.5/oz from January 12-23, Platts data showed.

On Friday, Platts heard a discount of $1/oz for the country as a whole.

The 2015 year-to-date average is a discount of $2/oz.

"With the Indian market now free of quantitative [80:20] restrictions, we should see much less volatility in the premium this year, likely close to the duty level [10%] for the bulk of the year," Macquarie analyst Matthew Turner said, adding that "it's possible the government at some point may introduce new restrictions, but I don't think the previous experience was a very positive one for most participants and as such they'll move cautiously."

The 80:20 rule meant that 20% of all imports had to be re-exported. This was on top of a 10% import tax, which remains in place.

A source said the removal of the 80:20 legislation had taken the local market by surprise.

"The premium has switched to a discount, all down to the dollar price going up," he added.

Mitsubishi analyst Jonathan Butler noted that Mumbai premiums had been as high as $150/oz just before gold import restrictions first began to be eased in May 2014.They turned negative at the end of 2014.

The Indian central bank has been grappling with a massive current account deficit and had been heavily taxing gold imports to quash the population's love affair with the metal.

One trader said he believes that the government will lower the 10% import tax to around 6% over the duration of 2015.

Regarding market chatter that the government may look to reduce the current import tax of 10% to anywhere between 2-6% in 2015, another source said that is "wishful thinking."

All sources agreed that demand is currently weak, with virtually no business being concluded.

SWISS CURRENCY MOVE ROCKED MARKET, GOLD FAVORED

Looking at the jump in the London spot price, which started the year around $1,170/oz, the main catalyst came January 15, when a surprise move by the Swiss National Bank to abandon its target exchange rate for the franc to the euro, sideswiping the market.

At the same time, the SNB lowered its interest rates by 50 basis points.

"The surprise move [caused] a flurry of activity across currency markets," UBS analyst Joni Teves said.

The dollar has been enjoying a solid run in 2015, which has had a negative impact on the wider commodities market.

The benchmark currency was also a weight on the gold price in 2014, as it started to gain momentum in the fourth quarter.

Still, having been a bugbear for the gold market last year, increasing dollar strength may have the reverse effect in 2015 and actually benefit gold as greenback's bull run dents investor interest in equities and other commodities, HSBC said in forecast piece January 15.

The bank is forecasting a 2015 average of $1,234/oz.

"The possibility that further gains will negatively impact financial markets this year raises the possibility that investors will seek out gold as a safe haven," senior precious metals analyst Jim Steel said in a detailed research piece.

DISCOUNT TRACKS SPOT GOLD, FOR NOW

So far in 2015 the Indian discount has tracked the dollar price.

Still, one London-based bullion source said that at some point this would have to change.

"The market is organic, right? It won't always be correlated with the dollar. Demand factors will have to kick in," he said.

The London spot price hit a year-to-date intraday high of $1,307.98/oz Thursday, but has been unable to retain that level.

Every time there has been a slight correction of $10-15, physical buyers in India have returned in modest numbers. As such, the discount has narrowed to almost flat at some points.

"The [Indian] market had been anticipating a correction at such high prices, [which has kept] demand subdued for some time," one Delhi-based trader said.

"The fall [in spot prices] has signaled a buying opportunity for those who have been holding out," he said, citing the impact of the marriage season on demand. The Indian wedding season, which runs until May, traditionally sees demand for gold and silver increase.

Imports by India, which account for more than 25% of global demand, range between 800-900 mt annually, according to the World Gold Council.

Last week, a source from a large jewelry company said he expects imports of 1,000-1,200 mt in 2015.

"[The spot] gold price is high. Therefore, volumes [in India] have come down," the source said. "As such, there's a tendency for people to speculate, to try to increase volumes. As a result, the market is seeing negative premiums."

SMUGGLING HAS EFFECT ON DISCOUNT TO SPOT

However, when the spot gold price has eased, it has not seen the discount do the same in all parts of India.

"There are few cities in India, like Mumbai, Chennai, Kolkata, where the discount [actually increased]," a Delhi-based trader said, attributing those increases to smuggled gold being pushed into the markets.

The higher international spot price gives black market traders incentive to sell.

It is believed smugglers can sell gold on the black market at around a 7% discount to the official price, which would keep official prices low.

Indian authorities introduced the 10% import tax on gold in 2013 in an attempt to shrink the country's current account deficit by curtailing its thirst for the precious metal.

Although the recent removal of the 80:20 policy was thought to have slowed smuggling, it is still believed to be fairly high by local sources.

Friday afternoon, the London Bullion Market Association London Gold price settled at $1,294.75/oz. It hit a 2015 year-to-date high of $1,298/oz on the morning of January 21.
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