Spot gold prices in India are hovering around Rs 27,000 per 10 gm, the lowest in over four months. The catalyst for the fall has been the recent easing of some import restrictions from the Reserve Bank of India. Also, traders anticipate a further fall in gold prices if the Narendra Modi government decides to rewind some of the import restrictions imposed by the earlier government.
Easing of Import Restrictions: The Reserve Bank of India last month removed some curbs on imports of gold. This led to a fall of Rs 800 in gold prices on May 22, its biggest one-day fall this year. The RBI expanded the number of private agencies that can import the precious metal while also allowing banks to provide gold loans to the sector.
R. Somasundaram, managing director of India World Gold Council, says it is estimated that gold imports are likely to increase by 100-130 tonnes under official routes after the RBI's new measures and it will help increase the availability of gold. "There is a huge arbitrage between Indian price and international price not only because of import duty but also due to spot premium. With increased availability, the spot premium will come down helping lower Indian price," he added.
Gold premiums in India have in fact almost halved to $30-$40 an ounce over the global benchmark, from $80-$90 in the previous month, Reuters quoting dealers said.
Anticipation of Price Dip: Traders anticipate gold prices to decline on expectations that the government will ease import restrictions. "There is a feeling in the market that import duty will be reduced from 10 per cent to 4 per cent in the upcoming budget. If that happens and rupee continues to remain strong, gold prices can come down to Rs 24,000-25,000 per 10 gm," says Sachin Kothari, director of BullionIndia.
India's current account deficit fell more than half to $32.4 billion in FY14, from $88 billion in FY13. This, coupled with rupee's rise which brings down the value imported gold in rupee terms, could give more room to the new government to ease import restrictions.
No Near-Term Seasonal Demand Pick-up: Generally, gold demand slows down in India when there is no festival or the wedding season round the corner. Mr Kothari of BullionIndia expects gold demand to remain soft in June and July. "So will not see much buying unless gold prices drop to Rs 25,000 per 10 gm level," he says.
Falling Investment Demand: According to World Gold Council, total investment demand during the first quarter (January-March) of 2014 in India was down by 54 per cent at 44.7 tonnes from 98 tonnes in the same quarter last year. In April, gold ETFs saw a pullout of Rs 146 crore in April, following a pullout of Rs 149 crore in March. "Of late, the popularity of the category has waned due to a subdued performance by the underlying assets," Crisil said in a statement. And with Indian stock markets rising to record highs, interest in gold as an investment asset is likely to remain subdued, analysts say.
Global Gold Price Outlook: Globally, gold prices are hovering at four-month lows of around $1,250 an ounce, with the yellow metal's appeal dented by the strong performance of global equities and anticipation of peaceful resolution of Ukraine crisis. Gold is often seen as an investment alternative to riskier assets such as stocks.
"Over the past week investors have turned more positive in the outlook for the global economy and for a peaceful resolution to the Ukrainian crisis, with more industrially sensitive commodities like silver and nickel seeing strong inflows and gold seeing outflows," ETF Securities said in a note. Brokerage firm Goldman Sachs in April this year maintained its forecast for the metal to end the year at $1,050 an ounce.