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India's gold import restrictions turn into political patronage for trading houses
Gold War: Traders Lock Horns with Star Trading Houses
By Ram Sahgal
The Times of India, Mumbai
Friday, July 25, 2014
http://economictimes.indiatimes.com/markets/commodities/gold-war-traders...
A war is brewing in the gold market with traders led by the All-India Bullion and Jewellers Association complaining to the Reserve Bank of India that its May 21 decision to allow premier and star trading houses to import gold for local sales has given half a dozen export houses a dominant position in the market and raised imports of the metal.
The RBI claimed that one of the complainants from the trade is likely to initiate action shortly, considering that the sharp rise in imports has happened during the traditionally slack month of June.
The trading houses strongly contested the claims of traders. They say the RBI's action had improved supplies and reduced the premium on gold, and that the traders' claims of the surge in gold imports are exaggerated.
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Four members of Delhi-based All India Bullion and Jewellers Association on Wednesday told C.D. Srinivasan, a chief general manager of the RBI, that the move to allow star trading houses to import gold for sale in the domestic market against the past two years' import performance has helped the big players import larger quantities than banks, which can import the metal only against their past three years' export performance.
Consequently, the star trading houses have gained greater control over supply in the domestic market than banks and other RBI-nominated agencies.
A letter presented by the association to Srinivasan, which the Economic Times has reviewed, claims that gold imports in June doubled to 106 tonnes from a month ago, thanks to the trading houses accounting for 75 tonnes or 70 percent of the imports. Banks, other nominated agencies, and export-oriented units are believed to have imported the rest.
Demand for gold tends to be slack in June and July as no festivities fall in these months.
Since these trading houses can directly export gold, they were able to export the mandated 20 percent of the first imported consignment post value addition, under the 80-20 rule, more quickly than nominated banks, which have to find export clients first. They were thus able to complete three or four transactions during the month against just a single transaction by banks, the letter alleged.
Further, a member present at the meeting told the Economic Times that since the large players have their own set of preferred clients in the domestic market, 80 percent of a consignment left after the 20 percent exported was provided to them to the exclusion of many bullion dealers and jewellers.
These charges were hotly contested by the likes of Rajesh Exports and Edelweiss, part of the six or seven export houses allowed by the RBI to import gold under the 80:20 rule since May 21. Officials from these two companies said that once the export obligation was complete under the 80-20 rule, they had provided gold to many constituents of the gold market.
"The RBI's move has greatly improved gold supply in the domestic market, because of which premiums have sharply declined from $20-25 an ounce (around 32 grams) to just $2-3 per ounce," said Rajesh Mehta, executive chairman of Rajesh Exports.
"These complaints are the handiwork of a few associations whose members have gained at the cost of the consumer who was being charged hefty premiums because supplies were constrained prior to premier and star trading houses being allowed to sell under 80-20."
An Edelweiss official agreed with Mehta and said he found the association's import figure "hugely inflated" because of probable "double counting."
"Overall the supply is in deficit and considering the demand in the pipeline we should see higher premiums between September and December," said Sudheesh Nambiath, senior analyst for GFMS Thomson Reuters, a precious metals consulting firm. "The current discount in the market reflects a seasonally low point with respect to demand. I think any measures to roll back policies to pre-May 21 can strain the jewellery industry significantly."
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