Two of the world’s biggest importers and consumers of gold continue to impact the market but in different ways. After India placed restrictions on gold imports from early 2013 (by hiking customs duty, imposing export obligation and import restrictions) China came to the rescue of the gold market. Strong Chinese imports last year supported gold prices.

But now, in an interesting turn of events, market saviour China’s gold imports are slowing. Trade data suggest gold imports into China fell again in May to the lowest level since January 2013. Despite being a major producer, China imports two-third of its requirement.

Of course it is known that China’s gold trade data are hard to track; but exports out of Hong Kong and Switzerland provide a good proxy. Given the importance of China to world gold demand, weakening Chinese imports are not good news at all. A principal reason behind import surge last year was the plethora of unmonitored gold financing schemes. There is now a crackdown on these financing schemes which has resulted in slowing imports.

Weaker Chinese imports are sure to act as headwind against the yellow metal, and therefore the market may react bearishly. Prices are struggling to stay above $1,300 an ounce. It is in this context that market participants are betting on India and are keen to see that the country becomes a saviour this time. Following stringent restrictions, India’s gold imports plunged in 2013. Inflows were about 180 tonnes in the second half of 2013; but picked up to 120 tonnes in the first quarter of this year. The second quarter ending June may see an estimated 150 tonnes of import. It must be stated that a part of the import may be for export too.

Customs duty There is expectation that the rate of customs duty (10 per cent ad valorem) may be reduced and import conditionality (80:20 scheme) may be watered down. While one has to wait for ten days to know what’s in store, it is going to be a tough call for the new government. There are headwinds. Inflation is still high with upside risk to crude oil prices triggered by Iraq-centric geopolitical tensions which can widen the current account deficit.

The rupee has pared gains and is weakening again. The government is desperate to raise revenue and will have to be brave to forego revenue by reducing the rate of duty on gold. Concerns over monsoon and risk of fall in rural incomes are real. Gold is not a priority for the new government. It may be too early for market participants to celebrate.

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