Gold Premiums in India Jump as Central Bank Curbs May Cut Supply

Gold premiums in India, the world’s biggest buyer, more than doubled on speculation that government restrictions on bullion imports by banks to rein in a record current-account deficit would reduce supplies.

The fees jewelers pay dealers for bars jumped as high as $40 an ounce today from $17 to $18 yesterday, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by phone from Kolkata. The Reserve Bank of India on May 13 limited imports by banks on a consignment basis to only those required to meet the genuine needs of exporters.

The biggest slump in prices in three decades last month led to shoppers crowding retail outlets across India to buy jewelry and coins, deepening concern that the nation’s current-account deficit, the broadest measure of trade, would widen from an all-time high. The rush to buy bullion caused a shortage of physical supplies, prompting importers to charge a hefty premium over London prices, according to Bamalwa.

“Banks have refused to deliver any gold except ordered previously, and bullion dealers are not accepting fresh orders,” Bamalwa said. “Whether the bankers and dealers will find another route to import and how they will go about it, it is very unclear.” Any impact from the restrictions is expected to be transitory and overall volumes will be determined by underlying demand, UBS AG said in an e-mail on May 8.

‘Cause of Concern’

The central bank issued a notice imposing the curbs after the trade deficit widened in April to $17.8 billion from $10.31 billion in March as gold and silver imports more than doubled to $7.5 billion from a year ago.

Gold imports have been a cause for concern and shipments need to be cut to 700 tons a year, said Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s economic advisory council. Demand may decline if prices remain stable, he said at a conference in New Delhi today.

Bullion entered a bear market in London last month as investors sold the metal in favor of riskier assets on speculation that the global economy was recovering. That sparked a buying frenzy from India to China and Turkey. Still, the price fell for a fifth day today and is off to its worst start to the year since 1982, losing 16 percent.

Inflation-Linked Bonds

Gold for immediate delivery dropped 1.1 percent to $1,409.37 an ounce at 6:55 p.m. in Singapore and is 27 percent below the record $1,921.15 reached in 2011. Futures tumbled to 25,270 rupees per 10 grams on the Multi Commodity Exchange of India Ltd. on April 16, the cheapest since September 2011. The June-delivery contract fell 0.9 percent to 26,479 rupees today.

India’s government will start selling inflation-linked bonds from June 4 as it seeks to wean away investors from gold as a bet against inflation, according to a finance ministry statement. The bonds may act as a substitute for some demand, Rangarajan said.

“Any of the measures taken by the government will not be able to curb the demand for gold because Indians have been buying gold for centuries, not in the last three or four years,” Bamalwa said. “A century-old habit cannot die away in a span of one to two years.”

About 60 percent to 70 percent of gold demand is from rural areas, where most buyers are unaware of other avenues for saving money and have limited access to bank accounts, he said. It may be four to five years before inflation-linked bonds become a popular investment tool, he said.

Smuggling Concerns

The government may refrain from raising import duties as it could fuel smuggling and illegal trade, Bamalwa said. India tripled the tax since January last year to 6 percent to cut buying and Finance Minister Palaniappan Chidambaram attributed the current-account deficit to a “passion” for gold. The deficit widened to $32.6 billion in the last quarter of 2012.

Imports may jump to 900 tons in 2013 from 860 tons last year because of the price decline, Bamalwa said.

“Gold will be at least 10 percent more expensive than international prices after the curbs on banks,” Pankaj Parekh, vice chairman of the Gems & Jewellery Export Promotion Council, said in an interview in New Delhi. “Even at higher prices, the demand will not fall and people will continue to buy.”