Indian
Premiums.
For centuries, India has been a massive importer of both gold and silver.
For the Hindu majority in particular, gold jewelry and silver ornaments have
deep appeal rooted in culture and tradition. Local mine supplies are limited.
A popular estimate is that
some 15,000 tonnes of gold is in private hands in India. That is some 10% of the total world gold stock. By
contrast, Central Banks claim to have a total of just over 31,000 tonnes, but
an unknown quantity has been lent (leased) out. Actual gold holdings of the
Central Banks and the Indian public may in fact be quite similar.
Indians are constantly buying
and selling gold to one another. Prices for the various grades and sizes
popularly traded are collected by merchant associations and reported for many
cities by the Indian press, usually on a twice daily basis. These could be
thought of as the small wholesale or large retail prices. It is reasonable
to assume that public interest and competitive pressure between the news
vendors keeps them realistic.
For over 30 years, the import
of gold into India was illegal, which lead to heavy smuggling. Starting
in the mid 1990s more enlightened policies were progressively adopted such that
gold (and silver) can now be imported freely on payment of a moderate duty.
What is of interest to
outsiders is, are prices in India high enough
to pay the costs of importing?
Essentially, this means buying the gold in the world market by converting
rupees into dollars, shipping it, paying the import duty (currently10.2 Rupees
per gram), the sales tax of the local state (supposed to be harmonized at 1%,
but there are a few deviants) any other local taxes, and leaving a profit
margin.
The two big items are the
import duty and the sales tax. I focus on what I call the ex-duty premium
because it is a clear starting point. So, for instance, in the afternoon of November 30,
2004, in the usually leading
import city, Bombay .999 gold was 670.5 rupees per gram. The exchange rate
was $1 =R44.6375. This meant that Bombay gold was $467.21 per oz. World gold was $451.85.
Import duty came to $7.11 per oz, leaving $8.25 as the ex-duty premium. Out
of this sales tax would have to be paid, say $4.52, leaving $3.73 for other
costs and profit. Gold will be transported immense distances for profits of
less than $1 per oz, so it is safe to say that Bombay was a buyer from the world that afternoon.
Modern communications have
revolutionized the relationship between the Indian gold trade and the world.
Using telephone and the internet, Indian arbitrage dealers/importers trade to
the end of the NY day. There have been estimates that laying off their business
sometimes accounts for as much as a fifth of Comex volume.
Secondly, and greatly to the
irritation of these Indians, it is possible, with some effort, to identify
quite precisely gold and exchange rates at the key times of the day and perform
these calculations. This would have been impossible only a very few years ago.
So it possible to settle quantitatively the question of whether India is or is not an importer at any point.
India is by far the biggest importer in the world. One of
the largest participants in the business has estimated the country might import
880 tonnes this year. This would be a third of global mine production.
Indian demand is price
sensitive (in rupees). High premiums have been a fairly good indicator of lows
in the world gold price. Sometimes, world gold rises high enough that imports
are not possible. Very rarely, world prices get so high that the premium is not
enough to cover the import duty, which creates a negative ex duty premium. I
have never seen Indian prices anywhere near being actually below world prices.
Exports sourced in India have therefore never been practical, although it is
said this did occur in early 1981.
JB
November 30, 2004