PRE-BUDGET VIEWS

1. Government had increased import duty on Gold before the budget. The government's move to hike the customs duty from 4 to 6 percent will have a loud impact on the Bullion sector. The hike sums up to around INR 60,000 (approx) per kilogram of gold. To be clear, with this duty hike a difference of 7 percent between the international and domestic price of the yellow metal is evident. Due to this, the increase in duty on the actual price of gold is being passed on to the retail consumers by the jewelers. This may also lead to rise of illegal channels and malicious activities with respect to importing gold and related products like jewellery etc., in the country. In turn it will lead to an increase in unemployment among the skilled artisans of the country (around 1-2 million families depend on this sector to earn their livelihood) as well the businesses of local jewelers across the country. I expect that this budget will address this issue and a fix duty structure will be levied. The extra revenue generated from the increased duty should be used by the government for creating new hallmarking centers, Research & development in mining sector. 

Hallmarking for jewellery is a great move by the government. It will ensure customer satisfaction by purity assurance. For this, the current need is to increase the hall marking centers at a faster pace so that the implementation is done in no time.

Research & development is the key to the future of Indian bullion industry. India is rich in mines but the R&D is so poor that we are hardly in position to extract much of its abundant resources. To be precise the country produced and refined only 1 - 3 tonnes worth of Gold. That’s less than 1% of the value of metallic mineral production in the country. On the other hand, China boosted its gold refining business after it gave companies a single-window clearance along with fiscal and infrastructure incentives which have put the industry on a fast track and made it a pillar industry in many of the country's gold producing areas. China's gold output increased 11.66 percent from a year earlier to hit a record high of 403.05 tons in 2012, confirmed by China Gold Association (Source: chinadaily.com.cn). This data showed that it is the largest producer for the sixth straight year. I feel that if R&D is carried in an efficient way, production of the metal will increase. This will reduce dependency on imports and in turn help the government to increase the forex reserve. As the metal will be extracted locally, customers will be benefitted pricewise, due to local production.'

I feel FDI is extremely important with regards to Research and Development. R&D is costly but with the help of FDI we can surely work out the way to get the most out of it. FDI will help in strengthening our rupee and in turn reduce the depreciation of our currency.

2. Most importantly, GST implementation is a must. If implemented, it is expected to provide a significant boost to investment and growth of the economy. GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting systems and transactions management. A flat 1% across India should be levied by the government, which would replace most indirect taxes currently in place.

3. Commodity exchange have now completed almost 9 years in India. Introduction of Option product for this exchange is must. Those who have the exposure should be given an opportunity. It will be a boon for a bullion trader and jeweler. By using this instrument they can hedge their future position and in a way provide the necessary risk cover. An investor will also be highly benefitted from this instrument. He/she will get a chance to invest in a larger quantity of metal with a lower investment and reap benefits till the expiry date. 

4. I understand that Government is thinking of introducing CTT tax, like the one in the equity market. CTT tax should not be charged on bullion dealers & jewelers, as it will only increase the metal price and in turn increase the price for the customers. It should be charged onto speculators only.

5. Gold Deposit Schemes are offered by banks in which investors deposit gold for a period of certain 3 years earning a fixed rate of interest.  Currently that has been reduced to 6 months. The depository scheme that the banks and MFs are enjoying should also be allowed to corporate, working for bullion industry. It will help to increase the gold reserves and in turn benefit the customers willing to deposit their idle gold. The government should harness the existing reserve of gold in our country rather than turning towards imports and implementing this alarming hike on customs duty. Hiking the duty on imports will in no way, curtail the demand, as the precious metal has always been regarded as one of the best investment options for social security. 

6. Indian households have nearly 25,000 to 30,000 tonnes of Gold. I expect that this budget would show an effective way to gain revenue by exporting it. I would suggest Government of India to introduce schemes like minimum tax scheme wherein an investor is charged minimum tax to convert his/her unaccounted gold into an accounted one. By this the government treasury will also increase and the idle gold can be put to use. The other scheme can be a VDS scheme (voluntary disclosure scheme) by which the Gold /Silver can be brought to the market.

7. I expect an increase in Gold loan scheme period to extend from 180 days to 360 days and LC tenure from 90 to 180 days. As of now Gold Loan is allowed up to 180 days which implies, a jeweler has to rollover his/her position twice in a year and that in turns leads to increase in imports. If the loan period is extended to 360 days, one cycle of loan will be reduced. A direct effect will be reduction in imports.

8. Currently, NRI’s are allowed to bring 1 Kilo of Gold while arriving in India. Earlier this was 10 Kilos. I feel this cap should be raised back to the earlier levels or even more. This too will help in reduction of imports and reduce the Forex pressure.

9. Indian Government does allow export of Gold in form of Jewellery. Export of Gold in form of bars etc should be allowed through banks to avoid money laundering. Moreover the exports should take place at the international market prices only (there is a value addition of 3%+, as per law, which should not levy in this case). Once the exports from India are allowed, there will be a direct effect on Gold price. Over the years, India has purely been an importer. With Exports, I expect the International price would reduce by $100-200 and provide the necessary reduction in India's Current account deficit. On exporting Gold, the refund of Duty should take place in cash or license form.

ANNUAL DEMAND FOR GOLD RISES DESPITE RISING PRICES (2012)- WGC

Today we scan and analyse the main highlight of the World Gold Council 4th Quarter Report 2012 - It states that demand for gold increased in the 4th quarter despite rising prices and economic slowdown.

Let's see WHY and HOW..........

Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives.

Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, saving and disposal plays a larger role in affecting its price than its consumption.

The World Gold Council released its Gold demand analysis for the 4th quarter of 2012. In 2012 total demand reached an all-time high of $236.4 billion; although on a tonnage basis it declined by 4per cent to 4405.5 tones. Global ETF demand increased by 51% compared to 2011. 

One important trend to be noted worldwide is that this annual demand for gold was coming from central banks and institutional investors. Central Banks added 534.6 tons to their reserves. In the fourth quarter of 2012, gold demand in tonnage terms declined by 4% wherein demand from the above mentioned parties had offset the consumer demand.

Chinese demand was flat year-on-year, reflecting the impact of economic slowdown. However looking at Q4, total demand was up 1% on the previous quarter to 202.5ton. Jewellery demand was 137ton up 1% on Q4 2011 and investment demand was 65.5ton, up 2% on the previous year. These increases may reflect the fact that the economic slowdown in China appears to have been shorter than expected.

During 2012 we saw gold touching its life time high in the Indian market. Adding to this, the government also increased duty on gold first to 4% and then to 6% in January 2013.

Interesting to note was that Indian full year demand was only down by 12% on the previous year, with a strong performance in the last quarter, where 261.9 tons meant an increase of 41% over the last quarter the year before. Demand for jewellery was up 35% year-on-year and the expected duty increase in 2013 was the reason for the strong imports at year end. 

Similarly, during Diwali (the biggest gold buying festival) there was an increase in gold demand in terms of value but simultaneously a drop of almost 30-40 per cent in terms of volume. The main reason behind this was the rising prices of gold. Rising prices meant that though demand for gold will go up in rupee terms but the denominations in which they are purchased will shrink.

For example, in November 2011 the price of gold per 10 grams was around INR 28000 however in November 2012, with the same amount you will be able to buy only 9 grams of gold given that price at that time was INR 31000 per 10gm.

But then India is also enjoying growth, the accompanying urbanization and a rapid increase in the size of the middle class. As this process progresses, dependence on the poorer agricultural sector diminishes and the gold market deepens and widens its demand shape. The Hindu family tradition that favors gold so much does not diminish with this process. Just as life insurance to the developed world stays in place with greater wealth, so gold retains its attractiveness with the Indian community. After all, since the year 2000, who can argue with the performance of gold? We expect that, as prices find support at higher prices, new and bigger demand will appear in this particular gold market

As gold and silver prices rise just like a thermometer measuring global financial uncertainty and instability, more and more investors are entering these markets for the first time, not for profit per se, but for protection against such fears and in an attempt to preserve the wealth they have. These investors come from the entire spectrum of investors across the length and breadth of our world

This is the quintessential reason why demand for gold will rise as gold prices rise.

China and India remain the world’s gold power houses, and by some distance, despite challenging domestic economic conditions. In India, consumer sentiment towards gold remained strong despite measures aimed at curbing demand, reaffirming gold’s role in Indian society. In an underdeveloped financial system in India, gold has an important role to play

Notwithstanding the predicted economic slowdown in China, investment demand was up 24% in Q4 on the previous quarter and jewellery consumption held steady at 137.0t.

Central banks’ move from net sellers of gold, to net buyers that we have seen in recent years, has continued apace.  The official sector purchases across the world are now at their highest level for almost half a century.

Despite the turbulent macroeconomic climate throughout the year, as well as the regional uncertainties affecting India and China, the two largest gold markets, annual demand was 30% higher than the average for the past decade

To give a brief on the past week turmoil:

RSBL Spot Gold price has plummeted from a high of INR 30,800 (Approx.) to INR 30, 100(Approx.) in the past week while Silver has plummeted from a high of INR 59300 to 56950 (approx).