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Minor blemishes aside, gold shone for Indians in 2013

Section: Daily Dispatches

From Indo-Asian News Service
via India Today, Noida, India
Wednesday, December 25, 2013

The World Bank and the International Monetary Fund may have written off gold as an investment option but the yellow metal shows no sign of losing its sheen in India.

In 2013 not only did gold prices witness an upward march to touch Rs 34,600 per 10 grams, the demand also remained somewhat intact.

Steady demand, despite import restrictions, saw gold prices swaying between Rs 26,440 per 10 grams in April to Rs 34,600 per 10 grams in August.

"Gold will always remain an asset class in India. It will never fetch any negative return. Temporarily, there can be some reverses but in the long term it cannot fade away," Bachharaj Bamalwa, director of the All India Gems and Jewellery Trade Federation, told the Indo-Asian News Service.

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Last year India imported around 960 tonnes of gold. High gold imports strained India's current account deficit, which touched a high of 4.8 per cent of the country's gross domestic product in 2012-13.

India, being the world's biggest buyer of bullion, imported a record 162 tonnes in May 2013. This shook the government, which was trying to rein in the huge current account deficit so as not to let the rupee depreciate any further.

The government raised the import duty on gold to 15 pe cent. This rise in import duty somewhat stalled gold imports between end-July and mid-October.

"This hiking of customs duty may help the economy in the short run but in the long run it does not because Indians will never stop buying gold. Thus the deficit in gold in the market, arising due to the hike in import duty, is filled by smuggled gold," economist Siddharth Shankar told IANS.

"Though the current account deficit looks a little better in the short run, in the long run the parallel economy is booming due to smuggled gold," Shankar added.

Somasundaram PR, managing director of the World Gold Council, said: "Gold is considered as a strong asset class and we believe policy direction should aim at easing the regulatory landscape for gold imports, viewing it as a strategic investment asset."

He said demand for gold in India, whether in the form of jewellery or investment (bars and coins), is predominantly retail and is driven by millions of individuals across rural and urban India.

"They invest in gold as part of their household savings. It is important to understand that jewellery is considered an investment -- not discretionary spending for consumption. It serves as a collateral for lending to a large class of borrowers in certain socio-economic segments," Somasundaram added. "Look at the wedding and festive season in last quarter of 2013. This suggests that the demand outlook remains strong and the long-term fundamentals of the gold market are intact."

During April this year the price of gold fell to around Rs 26,440 per 10 grams. But later it again rose and now it is hovering around Rs 31,000 per 10 grams.

"Over here, the 80-20 rule imposed by the government was a dampener for the industry," said Bamalwa, alluding to a government stipulation that 20 percent of gold imported by retailers must be exported. "Initially there was no clarification on this issue, which stalled gold import for some time. This led to a rise in smuggling of gold across the country," he said.

As a result, Bamalwa said, 2013 was one of the worst years for the industry in terms of imports mainly due to restrictions on imports and the volatility in prices due to the steep depreciation of the rupee.

Import duty on gold, which was 2 percent Jan 17, 2012 is now 15 percent.

"This year even during Diwali or the festive season the business was not good," Vipul Shah, chairman of the Gems and Jewellery Export Promotion Council, said. But he conceded that the situation was far from justifying the alarm bells being sounded.

Yet the industry expects that overall demand for gold in India for 2013 is likely to end at around 900-1,000 tonnes against 960 tonnes last year.

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