Gold Demand in India May Decline to Five-Year Low on Curbs

Gold demand in India, the world’s biggest user after China, may decline this year to the lowest level since 2009 as import restrictions deter buyers, according to the World Gold Council.

Consumption could decrease as much as 13 percent to 850 metric tons in 2014 from 974.8 tons a year earlier, said Somasundaram P.R., managing director for India at the producer-funded council. The number is the lower end of a range of 850 tons to 950 tons he estimates for 2014 and would be the lowest since 642.4 tons in 2009, council data show. The upper end would be the least since 2012.

A 10 percent duty on imports by India and a rule obliging shippers to supply 20 percent of their cargo to jewelers for re-export have hurt usage. The controls, introduced to limit a widening current account deficit and a decline in the currency, may cut imports to 650 tons to 750 tons from 825 tons a year earlier, Somasundaram said. The measures could be retained into next year, he said.

“One of the things about the new government is that whatever they do, they want to do it decisively and not flip-flop,” Somasundaram said in a phone interview from Mumbai. “Nobody is complaining about supply right now as the government has allowed more trading houses to import and the grey market continues to thrive.” In May he estimated consumption this year at 900 tons to 1,000 tons.

Official Imports

Inbound shipments surged 65 percent in value to $3.12 billion in June from a year earlier after the central bank allowed more banks and traders to buy gold overseas. Rising imports could pressure the current account deficit and prompt a strategy change from easing to more curbs, UBS AG said July 17.

Gold for immediate delivery in London advanced 9.1 percent this year to $1,310.64 an ounce on increasing tensions in Ukraine and the Middle East. Futures on the Multi Commodity Exchange of India climbed 0.5 percent this year to 28,565 rupees per 10 grams.

Official imports by India fell 43 percent to 351 tons in the first half from a year earlier, council data showed. Demand in the second quarter fell 39 percent to 204.1 tons, it said.

Unofficial flows may increase in the coming months as demand climbs during the festival and wedding seasons, the council said. More than 200 tons will come from unofficial channels this year, Somasundaram said.

Gold is bought during festivals in India and for weddings as part of the bridal trousseau. The festival season runs from late August to October and is followed by the wedding season.

A weak monsoon could cut farmers’ incomes and hurt demand for gold from rural areas, Somasundaram said. Rural India represents 60 percent of the nation’s gold consumption.

The monsoon, which accounts for more than 70 percent of annual rainfall, will be the weakest since 2009, according to the India Meteorological Department. An estimated 833 million people out of the 1.2 billion population depend on agriculture for their livelihood and the sector provides 14 percent of the nation’s gross domestic product.

(An earlier version of this story was corrected to show the range of the gold council’s forecast for 2014.)