Gold surge sees high discount sales

As price rises, dealers selling off yellow metal bought at a lower price; Customs duty cut also expected in coming budget

Friday saw another rise in the price of gold, a 16 per cent rise since the year began. However, with rising prices, the market has also slipped into a historically high discount for physical delivery.

In the past two days, a discount of $30 an ounce or higher (Rs 680-700 per 10g) was quoted. In Ahmedabad on Friday, it was $32.5 an oz, by NCDEX poll data.

Discounts are calculated on the cost of imports, including import duty. When supply is higher than demand at a time when bullion traders are not willing to hold stock for a longer while, they sell at a discount. Traders said in December, when prices were at a bottom, huge imports took place, higher than demand, and dealers had inventory of around 50 tonnes. That is now being offloaded with the rise in prices. Sudheesh Nambiath,lead analyst with GFMS Thomson Reuters, said: “Such a discount goes well with our demand estimates that there was heavy stocking in the December-ending quarter. With the price in rupee terms rallying significantly since January, it is only normal to see the metal up for sale.”
 

On Friday at Zaveri Bazar here, standard gold of 0.995 purity in the spot market closed nearly one per cent or Rs 275 per 10g higher, to close at Rs 29,110. On Thursday, on the Multi Commodity Exchange (MCX), futures gold was quoted above Rs 30,000 per 10g.

Since November, 300-325 tonnes of import is estimated to have happened. Nambiath said, “In some cases, it’s even better for jewellers to melt down their jewellery and sell as bars than wait for customers to come to their stores.”

The bullion trade apprehends a reduction in the customs duty in the coming Union Budget by two percentage points and, hence, none wants to now hold gold for long.

MCX is the leading exchange for gold and metals trading, and the rising gold price when all other asset classes are not doing well has pushed its trading volume, from a Rs 23,656 crore average daily in January to Rs 24,628 crore in February. Crude oil normally contributes 28.9 per cent and gold 20 per cent to its volume.

However, volatility in the price is a problem for genuine hedgers on the mark to market (revaluing of assets at current prices) margins. While punters are long on gold, those who imported at a high price sell on the exchange and hedge the price but rising prices force them to pay a higher margin.