News Column

UAE gold trade's lustre could dim on India moves

May 23, 2014

Manoj Nair Associate Editor

Dubai: Buying activity in the UAE's gold and jewellery marketplace could subside with India easing up on bullion import restrictions into the country. Retail prices of gold dropped on Thursday — by Rs800 (Dh50.32) and the biggest since August — and the prospects are there could be further declines in the near term. If this happens, the favourable differential between what it costs in the UAE and that in India would narrow considerably.

At the peak of this demand, anywhere between 15 to 20 per cent of the sales a month in the local gold and jewellery retail sector were bought for delivery into India.

This week, "The Reserve Bank of India has just allowed more gold trading houses to import gold into the country alongside the bullion banks, and that would translate into more and immediate supply to feed domestic demand," said Cyriac Varghese, general manager at Sky Jewellers. "With more supply, the premium on gold delivery should drop considerably from the current high levels of $30 an ounce and more.

"This premium, more than anything else, is what has led to the build-up of the sharp price differential between UAE and India gold prices." (Except for a couple of weeks or so in April-May last year, following a sharp drop in price led to a surge in retail demand here, the premium on gold delivery in the UAE has remained steady and at much lower levels than in India.)

Rupee strength

In the last six months, the tight hold imposed by Indian authorities on gold supply and sales within the country led to a spurt in buying by expat Indians and Indian travellers to the UAE. This would then be brought back to India, either legally or through less forthright means, and then sold in that market.

There is another factor that has pulled down gold prices in India — the Indian rupee's gathering strength against the dollar. It has dropped below to Rs60 to the dollar and on Friday was at Rs58.27. Some market watchers suggest it could push closer to Rs56 or so.

It also explains why despite global gold prices continuing to move within range, prices in India have slipped of late. "The rupee getting stronger is a factor and it's also being fed by speculation that the new government would have a more business-friendly approach," said Chirag Vora of Bafleh Jewellery, who believes that changes to Indian gold retail prices and their impact on volumes in the UAE market are overstated. "The impact [locally] will not be substantial.

"Sure, there's a chance that gold prices will fall further in India... but there will still be a certain pricing structure that will continue to favour UAE jewellers."

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Source: Gulf News (United Arab Emirates)

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