The Hindu Business Line : India, Japan may push gold higher

A BULLISH sentiment has been added to the already firm gold market with announcements coming from two major nations — India and Japan in quick succession.

Notwithstanding the fact that the Euro-dollar direction will remain the focus of most short-term speculators, gold is likely to find increased fund support, according to experts.

The Government's decision to allow direct import of gold and silver is seen as a shot in the arm for the bullion market. As part of the package of reforms designed to stimulate exports, the Government has decided to allow jewellery exporters, domestic bullion traders and citizens to import gold and silver directly without going through intermediary agencies.

Until now, only 15 nominated entities such as banks and State-run trading companies could import bullion. "There are two possible positive developments in terms of Indian import demand for bullion," said Mr Kamal Naqvi, precious metals analyst with Barclays Capital, "namely reduction in transaction costs for gold imports and expansion of letter of credit for bullion imports."

The nominated agencies will no longer be able to charge a premium (0.5 per cent to 0.7 per cent per transaction) and importantly, import demand will spread to more centres around the country, as it will no longer depend upon a nominated entity having a regional office.

"However, these advantages will be relatively modest as Indian prices are already trading at a small discount ($1-$3 per ounce) to spot world gold prices due to a local oversupply as a result of resilient imports and high scrap sales," Mr Naqvi said.

The letter of credit-backed gold imports have grown significantly in recent months, but restricted to nominated agencies, which take advantage of the interest rate and forward dollar/rupee arbitrage. As a result of this arbitrage, the agencies have been able to earn a premium of around two per cent on the value of gold, and this has been a major driver for resilient Indian gold imports, despite the high gold price, depressed demand, and large scrap sales.

Citing the experience of another country, Mr Naqvi said that the Indian situation is similar to what occurred in South Korea through the mid-1990s — the so-called `touchdown trading' — that led to a dramatic increase in monthly South Korean gold imports from 10 tonnes per year to a peak of 80 tonnes in July 1997. Subsequent changes in rules brought this trade to an end.

The latest development has the potential to raise India's gold imports, it is believed. It would not only increase import figures, but would also tie-up a considerable amount of physical gold in these financing transactions.

Another view is that a large increase in Indian bullion imports could help keep the rupee from appreciating. The other bullish news for the gold market was that "Japan is cautiously considering an increase in gold reserves." Japan has $10.24 billion worth of gold, or 765 tonnes (24.6 million ounces), a proportion of 1.5 per cent of its total reserves.