Gold in India Sells for $100 or More Over Spot on Black Market (If You Can Find It)

Capital controls limiting imports of gold into India led to four easily predictable results:

1. Short supplies
2. Higher prices
3. Flourishing black market
4. Government decree did not reduce demand

For the story behind the story, please see Official Denials Run Rampant in India; "No Question" of Economic Crisis; Rupee Plunges to Record Low; Gold Coin Imports Banned.

Gold Coins Vanish, Melted to Make Jewelry

As a result of import restrictions and capitals controls Jewelers are melting whatever gold coins they have to sell more expensive jewelry, thus gold coins have vanished in India.

Gold coins will not be available this Dhanteras and Diwali season beginning October last week. This is because jewellers have decided not to sell coins, and instead divert them to jewellery-making to meet the shortage arising from the government's curbs on imports of the yellow metal.

Coin sales reach their peak during the Diwali season every year as corporates, businessmen and people buy coins for gifting purpose. Banks and organized players have already stopped selling coins.

"We won't be selling coins," says Bhaskar Bhat, Managing Director at Titan Company which owns the jewellery brand, Tanishq.

India was the top fabricator and consumer of gold jewellery in 2012, accounting for nearly one third of global fabrication and consumer demand. India and China together account for more than half of global gold jewellery fabrication and consumption demand.

Not Much of a Festival Season

Also consider Not Much of a Festival Season as Gold Runs Dry

In India's biggest bullion market, Mumbai's Zaveri Bazaar, gold dealers are busy -- not filling orders for customers, but busy avoiding phone calls because they don't have any gold to sell.

Battling a huge trade deficit and a weak currency, the government has taken various steps this year to make it harder and more expensive for Indians to get hold of gold, the biggest item on the country's import bill after oil.

Hardly any gold came in for two months until mid-September and industry is still feeling the pinch, especially now the festival season has started, a peak period for demand.

In the bazaar, jewellers wander around trying to get hold of a dealer who can find them gold right away , and wholesalers ask the same of banks. Retailers in half-empty showrooms try to dissuade customers from asking for immediate delivery.

"Even if someone wants 10 kg, we don't have the stock. So much so that we have stopped attending client calls," said Gautam Arora, a wholesaler, who ignored at least five phone calls during a 40-minute conversation with Reuters.

The government has set a record 10 per cent import duty on gold and imposed a rule that requires 20 percent of imports to be re-exported, meaning importers need to find a buyer who will guarantee those exports before bringing in any gold.

The complexity of the rules and sagging exports -- down 60 per cent this year -- have caused supplies for domestic use to dry up.

Turnover at RiddiSiddhi Bullions Ltd (RSBL), the country's largest bullion dealer with 110 employees, has dropped to 20-30 kg a day from about 300 kg since the new rules kicked in.

"This is due to the government policy. I don't know what they are thinking," RSBL Director Prithviraj Kothari told Reuters from his Zaveri Bazaar office, a gold plate on his desk showing he was crowned "Bullion King of India - 2013".

"Why do I have 110 people if I don't have any consignments of gold?

The shortage of the metal sent Indian gold premiums to more than $100 an ounce over London prices this month when demand far exceeded supply due to the Dussehra festival, one of several connected with harvests and invoking Lakshmi, the goddess of wealth.

The related festivals of Diwali and Dhanteras fall in the first week of November.

"New imports for domestic use could start in the next 10-15 days, which could coincide with Diwali and Dhanteras. But despite new imports, the supply situation will be very tight and premiums may even go up to $150," said Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation.

Premiums in other parts of Asia such as Hong Kong and Singapore were stable at less than $2 an ounce.

One side effect of the government measure will do nothing to improve the trade figures: in the six months from April, gold jewellery exports more than halved to $3.34 billion from $8 billion in the same period a year earlier.

Many suppliers are turning to smuggled gold, especially as that also avoids the 10 percent import duty. As a result, even smuggled gold commands a premium of $50 an ounce above London prices, according to the Bombay Bullion Association (BBA).

Instead of tackling the real problem (runaway inflation), India placed severe restrictions on gold imports.

A black market was the expected result, and that's exactly what happened.

Worse yet, importers and exporters dependent on the gold trade, as well as all their employees, are now hurting economically.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com