PRECIOUS METALS CONTINUE TO BE THE FANCY OF INDIAN INVESTORS WITH THE COUNTRY RECORDING $9 BILLION IMPORTS IN JUST ONE MONTH, PUZZLING ECONOMISTS AND ANALYSTS.
The import of gold and silver by India has risen by a whopping 222% between April and May 2011, as compared to a year ago. In the month of May alone, imports were a staggering $9 billion, with gold demand growing 25%.
"Even as inflation and a widening trade deficit to $15 billion in May continues to weigh on the minds of Indian investors, the demand for fresh gold has continued to grow. This is very confusing, especially when one sees it against the backdrop of a 400% rise in the value of the rupee over the last decade," said bullion analyst Anand Patnaik with a brokerage firm.
India's commerce and industry minister Anand Sharma recently released trade figures. India's imports have surged to a 4-year high at a scorching pace of 54% mainly due to rising oil prices and a surge in gold imports. The country's imports have jumped to $40.9 billion, which has resulted in the gap between imports and exports widening to $15 billion - a 67% increase which is the largest since August 2008, prompting the government authorities to caution that India's trade deficit for 2011-12 could touch a record $145-150 billion.
Minister Sharma pointed out that exports of iron ore were down given the ban on exports imposed by the country. Imports in pearls and precious stones, however, have risen 24.6% to $ 5.20 billion, gold and silver by 222% to $ 13.5 billion and iron and steel by 13% to $ 1.80 billion, he said.
Rupee volatility has also played a part. The Indian rupee has a bearing on the landed cost of dollar-quoted gold.
"People in India have accepted high inflation as a reality of life," said Rajesh Shukla of the centre for Macro Consumer Research. Noting that Indians tend to use gold as a hedge against inflation, Shukla said this would be partly responsible for the spike in imports. He added that high imports reflected a strong demand for the yellow metal, despite the weakening of the rupee. The Indian rupee fell to its lowest in three weeks on Monday weighed down by losses in domestic shares and the euro, with dollar demand from oil companies also adding pressure.
"Bidding from oil companies is keeping the rupee lower. All of last week, the rupee depreciated. Hiking of key interest rates has further weakened the rupee," said a forex dealer at a national bank. He added that gold prices were under pressure. "Gold futures will rise on a weak rupee, but demand in the local market is quite poor at the moment."
Imports of gold and silver were at $8.96 billion in May, a growth of 500% over the previous month and 222% over last year.
"Rapid inflation is eroding the earnings of the common man. One has to understand how the import of gold has reached $9 billion for a month, while the yearly average is around $22 billion," said Sudhir Chakraborty, bullion analyst at Standard Chartered bank.
"The gold story is puzzling," added financial analyst A S Kirolar. "Consumers are shying away from stocks and bonds and heading to safe assets like gold and real estate, but one cannot understand this given the meager 12% growth in imports of petroleum and oil products."
Added another analyst Shabir Lakdawala, demand for precious metals in 2010 was way stronger. "In 2009, India had reported a 19% decline, when the worst monsoon in nearly four decades had dented bullion sales," he said.
Analysts maintained that India's central bank, the Reserve Bank of India's decision to grant licenses to seven more banks to import bullion has helped push up demand. Karur Vysya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Punjab and Sind Bank, South Indian Bank, State Bank of Mysore and State Bank of Travancore were added to the list.
As of the start of 2011, some 30 banks in India have been granted permission to import gold and silver. Jewellers are getting easy supplies which is also helping push up demand. Moreover, the flow of scrap is also expected to fall from a yearly average of 200 tonnes, which could again boost imports, underlining the insatiable appetite of the Indian consumer.
Bill Haynes: The markets for gold and silver keeping growing. The more widespread holdings of gold and silver are the more stable their prices will become.