Author: Paul Ploumis03 Mar 2015 Last updated at 04:19:32 GMT
(Kitco News) - Pent-up demand in India could continue to support gold in the short-term, which is why markets are ignoring the fact the Indian government did not lower import fees on the yellow metal, said some analysts.
On Saturday, the Indian government released its budget for the 2015-2016 fiscal year. Gold market participants were expecting the government to announce a lower duty on gold imports; even ministers within the government were calling for a cut in fees.
Analysts note that although tariffs have remained in place, jewelers will still have to replenish their stocks as most have been waiting for the government announcement.
“Local traders said purchases were deferred in anticipation of a cut; therefore, buying is expected to firm as seasonal demand materializes in coming weeks,” said analysts at Barclays Capital. “But for a sustained pick-up in demand, not only was a cut in the duty required, but it needed to be large enough to offset the cost of smuggling.”
Instead of encouraging more gold imports, analysts note the government appears to want to utilize untapped reserves and continue to lower its current account deficit. Union Finance Minister Arun Jaitley said when he released the budget that it is estimated India has 20,000 tonnes of gold stockpiled that is neither traded nor monetized.
In the budget the government announced three initiatives to exploit these idle reserves. The first would be to encourage gold holders to deposit their gold into financial accounts for a “gold bond” that will have a fixed interest rate. That gold could then be lent to jewelers.
The second initiative is for the government to create a Sovereign Bold Bond as an alternative to purchasing the metal. The bond would carry a fixed interest rate and could be redeemed in cash for the face value of the gold at the time of the redemption.
Finallym, the third government proposal is to create an Indian gold coin, which would lower the need for consumers to import coins minted from other banks. Jaitley said the coin would feature the Ashok Chakra.
Some analysts appear to be taking a wait-and-see approach to these new government initiatives as there are still a lot of questions that need answers.
Analysts at UBS noted one question for the gold deposit plan would be if there is the infrastructure in place to securely hold the gold, especially in rural areas.
“It is a bit too early to form firm conclusions on the impact on India's gold demand. No timeline has been set for the implementation of these plans, and according to news reports, it could take the government 3-6 months to provide the market with further details,” they said.
However, they added that previous similar initiatives have been tried and failed.
“Will the majority of Indian gold holders happily part with gold jewelry and ornaments that may have some sentimental value? The government will have to address these issues in order to make the new scheme more successful than its predecessors,” they said.
Julian Jessop, head of commodity research at Capital Economics, was a little more pessimistic on the government’s plan to monetize the country’s idle reserves.
“For now we would just note that a piece of paper issued by a government, even one referencing gold, can never have the attraction or security of actually owning the precious metal in physical form. It certainly would go down badly as a wedding gift,” he said.
Indian gold market participants had mixed feelings about the Union budget as the Gems and Jewelry Trade Federation congratulated government’s plan to monetize the country’s reserves. However, at the same time Federation spokespeople added they were also disappointed that import duties weren’t lowered.
Courtesy: Kitco News