India's gold trade is imploding

On Monday gold continued to drift lower trading around $1,320 in afternoon dealings after earlier in the day touching a near 0ne-month low. For 2016 the metal remains firmly in a bull market adding more than 24% or some $260 an ounce, the best year-to-date performance in decades.

Gold's rally this year comes despite a sea change in what has been historically the most significant physical market for the metal.

With little domestic production, India has dependably imported between 700–900 tonnes in recent years (2015's gross total was a near record 947 tonnes) and going back decades has been the world's number one importer of the metal; only on two occasions handing the crown to China.

"Policy changes are hard to keep up with, difficult to adjust to. A discount ranging between $30/oz and $100/oz is killing the market"

Such is the appetite for gold inside the country that importers have always been able charge premiums for physical delivery, sometimes in excess of $100 an ounce during the busy festival and marriage seasons that kick off in October each year.

Following government import curbs and duties (an onerous 10%) and other trading restrictions introduced in recent years, the dynamics in the domestic market have been turned on its head.

Gold imports have all but imploded with shipments dropping to to just 130 tonnes year to date. At this rate annual imports could be the lowest in at least two decades.

Despite the lower tonnage the price of gold dropped to an unheard of $65 an ounce discount to the international price in July. The July average has been nearly $52 below according to data supplied by S&P Global Platts data. The Platts India 995 assessment has averaged minus $22 an ounce in 2016.

According to a Platts News report from the inaugural Bullion Federation conference held over the weekend in Agra, India's gold market has undergone a fundamental transformation.

One senior banker told Platts he expects imports of bullion reducing in coming years "to a point where they average around 300-400 mt/year":

"Logistics sources talked of packages as small as 17 kg being transported, levels that would have been laughed at previously.

"It's crazy how small the amounts moving are," said one senior logistics source on the sidelines of the event.
"It's crazy how small the amounts moving are," said one senior logistics source on the sidelines of the event

"A senior banker in London challenged anyone that is making money in India at the moment, "you find me someone, it's impossible."

The higher dollar price and smuggling have also been blamed for the standstill in the market, but Platts quotes conference participants as saying "smuggling has always been a factor in the Indian market and that it shouldn't be seen as the primary cause for the current dire trade conditions":

"Nearly all traders and bankers said that they have done zero business in the past five-months.

"Policy changes are hard to keep up with, difficult to adjust to. A discount ranging between $30/oz and $100/oz is killing the market," said Prithviraj Kothari, director of RSBL.

"If this continues for much longer more people will be going out of business, even the bigger guys," said another banker.