Indian consumers' insatiable appetite for gold and the burgeoning current account deficit (CAD) prompted the Reserve Bank of India (RBI) to further tighten the gold import norms late Monday evening.
As per the latest norms, an entity importing 100 kg of gold that will have to be kept in bonded warehouse, for example, will have to release 20 kg to exporters (gold / gold jewellery) against an undertaking to Customs authorities. The new policy will be applicable to gold imports in any form /purity, including gold coins, reports suggest.
Earlier in June, the central bank had decided to restrict gold import on a consignment basis by banks, nominated agencies and star trading houses. Import against suppliers' or buyers' credit was mandated to be done on 100 per cent cash margin basis and on documents against payment (DP) basis.
At the global level, persistent worries over the US Federal Reserve's plan to wind down its monetary stimulus saw gold dip to $1,200 an ounce in June.
So, what do the recent measures mean for investors and will they have a meaningful impact on gold price trajectory? What should be your investment strategy then?
"The main aim of the RBI through this recent measure is to restrict import, limit all the gold coin and other transactions through jewellery shops only and avoid banks, non-banking finance companies (NBFCs) entering this arena. The move is likely to generate more interest in refining from scrap gold which is available in huge quantity in India," said C P Krishnan, wholetime director, Geojit Comtrade.
"As regards key levels, the yellow metal will find resistance around $1,350/oz levels (current price: $1334/oz). I expect the prices to scale back and one can enter at sub-$1,300/oz levels. The medium-to-long term trajectory will depend on how the US Federal Reserve's plans for quantitative easing withdrawal play out. However, I don't expect prices to gallop from here on. They will remain in a trading range of $1,250 – 1350/oz," he adds.
Adds Ram Pitre, senior vice-president, head of commodity and currency research at Anand Rathi Commodities: "We believe that the latest move by the RBI is aimed at discouraging imports further and at the same time, encourage exports. One of the key developments was that all nominated banks/agencies will have to ensure that at least one fifth of every lot of import of gold is exclusively made available for exports. With most of the gold imported into the country used for domestic consumption purposes, we expect supplies of gold to be impacted due to this move in the months ahead. This in turn is likely to increase premiums on gold, and thereby make the metal more expensive in the domestic market."
"Rupee's depreciation against the US dollar has also proved to be a problem. Those importing gold are not able to hedge their position in the currency futures market; and hence the volatility. We recommend short-term investors to buy gold on any dip towards Rs 27,200 - 27000 per 10 grams and expect a target of Rs 28,200 - 28,500 in the next couple of months. From a 6 – 12 months perspective, however, we are not that optimistic on gold as we expect investment demand for the metal to remain weak," he adds.
Points out Philip Poole, global head of macro and investment strategy, HSBC Global Asset Management suggest that gold prices have corrected in the recent past partly because the Indian authorities have put curbs on imports. "Central banks across the globe, especially Cyprus, had started selling their gold holdings earlier. More importantly it is weaker because the big picture risks that were considered problematic in 2012 (break-up of the euro-zone, US fiscal cliff) have become less problematic now. If treasury yields start to move up, gold prices could trend down. However, they will find trading range equilibrium around the current levels. I don't expect a dramatic fall from these levels," he adds.
Tom Kendall, Ric Deverell and David Sneddon of Credit Suisse had suggested in their May 2013 report that the price of the yellow metal remains a long way above historical means. "In real terms (current dollars, adjusted for US CPI) the average price of gold over the very long run (150 years) is around $520/oz. Even bringing the period forward to 1971 onwards (i.e., since the end of Bretton Woods/fixed gold price) only lifts that average to $780/oz (real, current dollars)."