Gold prices hardened by Rs 50 to Rs 31,700 per 10 gram at the bullion market on September 21. It was in line with a firming trend overseas. It also coincided with an increased buying by local jewellers. Traders and analysts attributed this firming up of the yellow metal prices to weakening of dollar, which in turn was caused by receding fears of a full-blown US-China trade war.
“International gold prices found support on a sliding dollar index in the last three trading sessions; further upward movement can be seen if prices breach $1,217 per ounce, whereas Indian domestic gold prices are not able sustain their rallies due to strengthening rupee against dollar. The dollar/rupee rates dropped from recent high of 73.04 to 72.39 in the last two trading sessions and gold prices were seen losing more than Rs 300 per 10 gram in the same time interval,” said Abhishek Bansal, founder and chairman of ABans Group of Companies.
“On the domestic front, to address the rising current account deficit (CAD), the Centre is left with no choice but to control non-essential imports, which include gold. Other than increasing import tariffs on gold, the government may promote the gold monetisation scheme (GMS). If the government promotes the scheme with additional incentives such as increased interest rates, once the consumption cycle improves, dependence on imported gold will reduce gradually. We think later countermeasures would be more supportive to the Indian economy in the long run as increased import tariffs on gold may shift the formal gold market to informal cash trades,” Bansal said.
Interestingly, when the gold monetisation scheme was introduced in November 2015, it failed to evoke a decent response.
Even as the government continues to work out various ways to reduce non-necessary imports to stem the dollar outflow, the World Gold Council (WGC) is against tampering with the gold import duty or imposition of other restrictions to support the rupee. The London-headquartered council pointed out that the current demand for the yellow metal is already down 7 per cent this year from a year earlier and gold is not at the centre of the current account deficit issue.
Significantly, India is believed to have the capacity to produce over 100 tonnes of gold per year to meet the country’s enormous demand for the precious metal, which is mostly met by imports. India, at present, produces 1-1.5 tonnes of gold per year from just one working field in the country while it consumes 900 tonnes per annum of yellow metal.Analysts are of the view that India can actually ramp up its capacity to produce between 100 tonnes and 200 tonnes of gold in a year and that can come out of as many as 20 mines. To scale up mining to these levels, an investment of nearly $1-1.5 billion would be required. Even the WGC recently said despite a long history of gold mining, India’s current production levels of the yellow metals are very low.