LAUNCESTON, Australia – (Reuters) – Gold bulls tend to flit from one thing to the next in their search for a reason for the precious metal to rally, with the latest hope being Narendra Modi’s election victory in India.
The reasoning appears solid enough. Modi’s pro-business Bharatiya Janata Party is likely to roll back some of the tough measures taken by the former government to curtail gold imports as part of efforts to lower India’s current account deficit.
Gold is India’s second-biggest import by value behind crude oil and the former government progressively raised the import duty to 10 percent and imposed a rule that 20 percent of gold shipped in must be re-exported as jewellery.
These measures, which gold bulls had largely dismissed as irrelevant to Indian demand, served to crunch imports, which started dropping sharply from the third quarter of last year.
Indian demand fell 26 percent to 190.3 tonnes in the first quarter of 2014 from the same period a year earlier, according to data from the World Gold Council (WGC).
This followed falls of 16 percent in the fourth quarter of 2013 and 32 percent in the third quarter of last year, declines which saw India surrender its status as the world’s top gold consumer to China.
One thing the gold bulls may have correct is that Indian demand is still there, and it has just been hit by government intervention.
The key question is how quickly is Modi’s new government likely to lower the import duty or relax the re-export requirement?
While Modi may well be well disposed to the gold sector, he’s likely to be swamped with other priorities at the start of his administration.
He’s also likely to be reluctant to give a signal that it’s “game on” for gold imports again, as he won’t want the current account deficit to start heading the wrong way once more.
India’s current account deficit was likely about $35 billion in the fiscal year ended March, the former finance minister said on March 31, lower than the $88 billion for the previous year.
At the current spot gold price of about $1,294 an ounce, each additional 100 tonnes of gold imports adds about $4.56 billion to the current account deficit.
If the first quarter demand of 190.3 tonnes was maintained through the year, it would take total demand for the year to about 761.2 tonnes, short of the 900-1,000 tonnes the WGC expects for Indian demand in 2014.
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