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LAWRIE WILLIAMS: Indian gold imports on track for 900 tonnes this year

While in recent articles I have been focussing on Chinese gold demand and SGE deliveries, I have been ignoring Indian demand, which together with that of China, absorbs most of the world’s new mined gold production.

India is heading into its seasonal peak demand period which started with Ganesh Chaturthi on 17th September (officially the start of the long festive season) and the start of the wedding season in October, so much has been made in some quarters that at the moment Indian prices are trading at around a $7 discount to the London gold price when normally the market trades at a premium.  An HSBC analysis published on Monday, for example, is seeing this as a warning sign for global gold prices – but perhaps it’s too early to tell yet and demand may well pick up as the wedding season gets into full swing.

To what is the current Indian weakness attributed?  There are worries about this year’s lighter than usual monsoon rains affecting agricultural production and earnings in the months ahead.    The rural sector, which accounts for around half of India’s population, is traditionally the strongest contributor to gold purchases and a crop deficiency could suggest a significant drop in demand here.

The Indian government is still desperately trying to control gold imports to help it balance its books with gold imports accounting for such a significant portion of the country’s Current Account Deficit. But the jury is still out on whether its proposals to persuade gold holders to trade in their bullion for interest bearing securities will be heeded – and anyway this is probably a more long term potential solution, even if it works, and may not have any significant short term impact.

What is probably causing the price discount at the moment is the massive amount of gold imported in August – both as bullion and as doré – meaning stocks are high.  Precious Metals analysts Metals Focus report in their latest India Focus Monthly newsletter as follows: ‘Starting with imports, Q3 has witnessed a sharp increase in gold imports, with the total for August/September standing at 233t, some 240% higher yoy. Looking at imports in more detail, of the 233t total, 23% or 54t (with 80% average purity) was in doré form, with a further 37t earmarked for jewellery exports. This means 185t has been set aside for domestic purposes. Overall, this marks the highest quarterly import total this year.’

While the consultancy reckons that the discounts may not persist for long as the main Festival and Wedding seasons get under way, others are not so sanguine and the confluence of negative factors at least suggests that import levels will likely drop off with a potentially adverse effect on global demand.  The Indian market is quite price sensitive too and the weak rupee/strong dollar will probably not have helped.  With the bank analysts almost all looking for lower gold prices to come, buyers may well be holding off for a further price fall.

But even so, Indian gold imports this year are already currently estimated at around 670 tonnes to the end of August, although official figures are awaited to confirm these estimates which are based on assumed average gold prices in July and August and the dollar value of these gold imports. Extrapolated over the full year this would suggest total imports this year of just over 1,000 tonnes but given month by month figures can vary dramatically, import levels for the rest of the year will be watched closely to see if they are holding up – we suspect the possible oversupply position at the moment may at least see a drop in the September figure.  Historically end Q3 and Q4 – particularly September, October and early November ahead of the big Dhanteras and Diwali festival (Nov 10-16 this year) – tend to be the strongest months for precious metals imports, although if demand is as muted as some reports suggest this may not be the case this year.  But even if Indian imports and demand do fall back the country looks still to be on track to take in around 900 tonnes of gold over the full year.

In China meanwhile, gold remains at a small premium over global spot prices despite the massive SGE deliveries, but there’s a week-long holiday starting October 1st (National Day and Golden Week) so the huge withdrawal figures from the SGE which we have been commenting on (see Latest SGE gold deliveries suggest enormous 2015 total of over 2650 tonnes!) will come to a temporary hiatus with the Exchange closed from October 1st to 7th.

We have also looked at Chinese gold imports plus domestic production and together these will probably total around 1,800 tonnes or more this year (See: What is China’s real gold demand?) giving a two-country (with India) total of some 2,700 tonnes plus.   If one just takes the import figures noted above and adds in estimated central bank purchases the total comes to close to, or could even exceed, new global mined output of around 3,150 tonnes.  This leaves little or nothing in terms of new gold production for the rest of the world’s annual consumer demand (another 1,500 tonnes in 2014 according to the World Gold Council).  Recycled gold may supply perhaps 1,000 tonnes, although this has been falling due to lower prices.  Overall this suggests a serious potential global supply squeeze – or a significant further depletion in western gold inventories as gold continues to move eastwards.

30 Sep 2015 | Categories: Gold

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