End to India’s 80:20 rule beneficial for gold but not yet – Barclays

Otmane El Rhazi from The Bullion Desk.

The easing of restrictions on gold imports to India will be supportive of prices but not in the near term, Barclays said in a note this morning.

Gold slipped after the Swiss gold initiative was rejected but the metal initially made no discernible reaction to India’s surprise lifting of the 80:20 rule, Barclays said – the market remained focussed on dollar movements and the price of oil.

The yellow metal had a volatile week last week, hitting a low of $1,146.80, just $10 from four-year lows, and a near-two-month high of $1,222.10 as oil prices took a beating and mixed macro data shook commodities markets.

“The floor for gold prices has improved following India’s trade announcement. However, given stockpiling and the seasonally strong period for consumption drawing to a close, the floor is unlikely to firm immediately,” the bank said on Monday.

India removed the rule that made it mandatory to export 20 percent of all gold imported into the country, which was introduced to counteract the country’s ballooning current account deficit.

Many importers in India reportedly stockpiled large volumes of gold in November after reports began to emerge that India would again look to raise the barriers to imports. Imports reached 150 tonnes in October after September’s total of 120-130 tonnes and look set to exceed 100 tonnes again in November.

“Our economists do not believe that this announcement will affect India’s current account deficit and a number of dealers had stockpiled in recent weeks, anticipating tighter trade restrictions. In turn, we do not believe that the news is likely to offer support immediately,” Barclays added.

But falling oil prices – Brent crude is trading at five-year lows around $66/67 per barrel – should start to ease the deficit, which widened to $10.1 billion in the July-September quarter from $7.8 billion in the previous quarter and $5.2 billion a year ago, the Reserve Bank of India said on Monday.

Oil is India’s largest import item in value terms, followed by gold – the two commodities account for 45 percent of all of the country’s imports.

India’s Gem and Jewellery Federation has also requested that the import duty be reduced to five percent initially and then to two percent from 10 percent at present to combat smuggling, Barclays also pointed out.

Stringent import duties and restrictions that have been in place since 2013 have encouraged the illegal flow of metal to the country, which vies with China as the world’s largest consuming nation.

“We believe this trade restriction easing is likely to lower smuggled gold at the margin, given the difficulties in matching importers and exporters. The easing of restrictions timing coincides with not only lower oil prices but also the end of the seasonally strong period for consumption,” Barclays added.

“Gold has significant headwinds to overcome in the form of a stronger dollar and the prospect of rate increases but the floor for prices has firmed somewhat following India’s announcement that it would lift its trade restrictions,” the bank added.

(Editing by Mark Shaw)

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