India, the world’s second-largest gold market, is seeing a significant change in the way gold enters the country. The increase in import duty from 6% to 15% has made official imports more expensive, prompting a sharp rise in unofficial supplies. At the same time, record gold prices are putting pressure on consumer demand.According to a World Gold Council report, gold smuggling is estimated to have climbed to around 50 tonnes in the September quarter, compared with just three tonnes in the same period a year earlier. The surge highlights how higher import costs have had unintended consequences for the market.
Gold smuggling up
Gold demand recovered 24% sequentially to 162 tonnes in the previous quarter, supported largely by seasonal jewellery purchases. However, demand remained 29% below its year-ago level, as high prices continued to deter many buyers.Spending patterns told a different story. In the first nine months of the year, expenditure on gold increased 3% year-on-year and 38% sequentially, suggesting that consumers are spending more even though they are purchasing smaller quantities.Jewellery accounted for much of the quarterly recovery, with demand rising 33% sequentially to 100 tonnes. Seasonal buying and some easing in prices towards the end of the quarter helped support purchases.Despite this improvement, jewellery volumes remained 20% lower than a year earlier in the quarter. Demand over the first nine months was also down 18%, underlining the growing difficulty consumers face in affording gold at current prices.Investment demand, too, showed signs of stabilising after the strong buying seen last year. Demand for bars and coins increased 9% sequentially to 55 tonnes, although it was 40% lower year-on-year, partly reflecting the particularly strong comparison base. Gold exchange-traded funds (ETFs) also attracted greater interest, with demand rising to 5.3 tonnes in Q3 from 3.6 tonnes in the preceding quarter.The increase in import duty has changed the cost dynamics of gold supply in India. With the duty now at 15%, bringing gold into the country through official channels has become more expensive. This, in line with historical trends, has increased the incentive to use unofficial supply routes, according to an ET report.Looking ahead, festive-season purchases and demand during the wedding season are expected to provide support to the gold market in the December quarter. However, high prices could continue to weigh on jewellery volumes. Investment demand, meanwhile, is likely to depend largely on price movements and investors’ expectations of further gains.The market is therefore expected to witness a growing gap between the value of gold purchases and the quantity bought. Consumers may continue to spend more on gold, even as elevated prices limit the volume they can afford.
