Record Gold in India Seen Hurting Jewelry Demand as Rupee Slumps

Gold advanced to a record in India after the nation’s currency extended a plunge to an all-time low, threatening jewelry demand during the main festival season in the world’s largest consumer.

The contract for delivery in October surged as much as 3.3 percent to 32,933 rupees per 10 grams ($1,555.96 an ounce) on the Multi Commodity Exchange of India Ltd. in Mumbai today. Futures have rallied 33 percent since reaching a two-year low in June as the rupee tumbled about 10 percent, more than the 14 percent gain in bullion priced in dollars.

“The gap between domestic and international prices has become too much after adding the import duty, value-added tax and high local premiums,” said Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation, which represents 300,000 jewelers and bullion dealers across the country. “I am not too optimistic about demand during the festival season. This is an inflated rate.”

Slowing demand may cheer Prime Minister Manmohan Singh’s government, which has raised import taxes on gold thrice this year to moderate consumption that has contributed to the slide in the rupee and a record current account deficit. Banks and traders have halted imports since the end of July after the central bank linked inbound shipments to re-exports.

Bullion in India rose as gold in London rebounded since reaching a 34-month low in June as demand for jewelry, bars and coins soared from China to Turkey. The rupee tumbled more than 2 percent to 66.0775 to a dollar today on concern that the current-account deficit will worsen as oil prices climb amid political tensions in the Middle East.

Convincing Consumers

“Indian consumers are confused right now and they are not going to come and buy jewelry at this point in time,” said Soni. “Consumers have seen 26,000 rupees rates just couple of months ago. It is difficult to digest this rate right now and it will be very difficult to convince customers to buy.”

Gold is bought in India during festivals, for marriages as part of the bridal trousseau and gifted in the form of jewelry by relatives. The festival season in India runs from August to October, followed by the wedding season from November to December and from late March through early May.

The rally may spur scrap gold sales and ease a shortage of the precious metal in the domestic market, Soni said.

“Earlier 15 percent to 20 percent of our total turnover used to be from scrap sales,” he said. “This time we are expecting it to double.”

Recycled gold supply in India fell 44 percent to 31 metric tons in the first six months of 2013, even as gold imports jumped 45 percent to 553 tons, World Gold Council data showed.

Higher tariffs and central-bank rules linking overseas purchases to re-exports may cut India’s imports in the second half to not more than 150 tons from 478 tons in 2012 and spur smuggling, according to Bachhraj Bamalwa, a director with the jewelry federation. The country may not import any gold in August, he said yesterday.

Consumption in India, which imports almost all the bullion it needs, accounted for about 20 percent of global demand in 2012, according to data from the gold council.