India's strict import rules add lustre to Dubai gold trade

dubai - Gold market continues to benefit from unprecedented investor demand seen in the first half of the year

Fortunes of Dubai as a global trade hub of gold will not be hit by the dismal prospects of slowing demand in India, the world's largest consumer of yellow metal, precious metals analysts said.

On the other hand, the latest forecast by the World Gold Council (WGC) that India's gold demand could fall as much as 24 per cent in 2016 to the lowest level in seven years due to higher prices that hit a 13-month high in the third quarter, and increased smuggling as Indian government seeks to bring transparency to bullion purchases, could be seen a boon for Dubai's gold and jewellery trade, analysts said.

Passengers flying via Dubai to India and Gulf-based Indian expatriates will now be increasingly tempted to take home more than the permissible duty-free quantity of the yellow metal since the profit margins would widen, traders argued.

Over?$75 billion worth of gold, or about 40 per cent of the world's physical bullion exchange, was traded through Dubai in 2013, according to the Dubai Multi Commodities Centre.

Weak investment demand and low consumer interest in India and China were the perfect storm for gold, causing total Q3 demand to drop 10 per cent, latest WGC Gold Demand Trends report said.

Juan Carlos Artigas, director of investment research for WMC, said despite the report showing global gold consumption down at 992.8 tonnes last quarter, global gold demand is up more than seven per cent year to date, compared to 2015.

He noted that the gold market continues to benefit from unprecedented investor demand seen in the first half of the year.

Precious metal analysts argued that the factors that had driven gold's investment demand so far this year - low interest rates, significant financial uncertainty and overpriced market evaluations - are not going away and even though investor interest waned in the third quarter, it is expected to remain a positive factor for the market.

Globally, jewellery demand totalled 493.1 tonnes, down 21 per cent compared to last year; technology demand dropped one per cent at 82.8 tonnes; and central banks purchased 81.7 tonnes of gold in the third quarter, down 51 per cent compared to 2015.

In a country breakdown, the two biggest gold-consuming nations saw significant double-digit declines between July and September. Indian gold demand totalled 194.8 tonnes, down 28 per cent compared to last year, while China saw total gold demand of 182.5 tonnes, down 22 per cent from 2015. The US, which saw strong gains in the first half of the year, consumed 43.6 tonnes, a decline of 24 per cent.

In 2016, demand in India is expected to fall to between 650 to 750 tonnes, the lowest since 2009 and far lower than last year's 858.1 tonnes.
"The government's measures to improve transparency also boosted smuggling of gold, which is likely to rise up to 160 tonnes in 2016, from 100 to 120 tonnes in 2015," bullion experts said.

Smugglers were offering gold at heavy discount during the third quarter and forced many refiners to scale down operations, the WGC said in a report released on Tuesday.

Consumer demand has suffered because of the surge in prices as a result of investment demand.

While the third quarter was a low point for physical demand, Artigas said the fourth quarter is starting on a very strong note as prices started the new quarter with a five per cent drop. Anecdotal evidence has shown that Indian and Chinese consumers have already been taking advantage of lower prices, he added.

Gold prices hit a 13-month high at the start of the third quarter in early July as markets reacted to Brexit. The WGC noted that the London Bullion Market Association London Gold Price benchmark averaged $1,334 an ounce between July and September, a 19 per cent increase compared to the same quarter in 2015.
- issacjohn@khaleejtimes.com