Volatile Indian Gold Market Looms Ahead of the Diwali Festival

The Indian government’s recent imposition of a stricter anti-import policy on gold has pushed premiums on gold investment bars to a record high but compelled many jewellers to introduce promotions in order to cope with struggling sales. 

Premiums on gold investment bars have this week risen above $120 per ounce over the London price, a new record high according to Reuters.  Following the recent implementation of higher import duties and tight rules on gold, supply for the yellow metal dwindles vis-a-vis a high local demand.  “Demand is picking up and supplies have dried up,” Bullion Vault quotes Bachhraj Bamalwa of the All India Gems and Jewellery Trade Federation.  Demand for gold is expected to further shoot upwards because of the Diwali Festival or Festival of Lights; when buying ornaments such as gold jewelleries is considered an auspicious exercise. 

As the Diwali Festival approaches, jewellers on the ground are struggling to make sales and have introduced a host of promotions and freebies to attract customers to buy gold.  In Delhi alone, some jewellery stores are offering price discounts, gold coins and even free hotel accommodations and travel vouchers to customers to make up for the expected lower sales growth of gold items in this year’s Diwali season. 

“In 2012, we had witnessed a growth of 20-25% over 2011.  But this year we are expecting a growth of 10-15%,” RK Sharma of the PC Jeweller said.  According to Mehul Choksi of Gitanjali store chain, overall gold jewellery sales have fallen 30% compared with the same period in 2012. 

Gold prices in India have witnessed a rollercoaster ride in 2013 which has affected demand for the precious metal in urban centres such as Delhi.  Prices went down to Rs 26,000 (£260) per 10 gm in May, and then climbed up to Rs 33,000 (£330) per 10 gm in August-end as the Indian Rupee weakened against the U.S. Dollar.  In September, prices again went down to Rs 29,000 (£290), and are now hovering around Rs 31,000 (£310) per 10 gm. 

India was overtaken by China as the world’s biggest gold buyer in the first quarter of 2013, according to the World Gold Council.  Even with the surge of gold purchases for the Diwali holidays, it seems like India will have a hard time reclaiming its former position from China because of lower gold production and tighter government rules on gold importation.