The Daily Nugget: Import Duty Will Encourage Smuggling

Gold was unsure which way to go yesterday as import duty rises from India helped to curb demand whilst weak jobs data and strong demand from China helped to support prices. The current gold price stands at $1,401, still trading narrowly as it awaits tomorrow’s data.

The ADP Institute’s Private US jobs data yesterday showed US firms hired less than expected in May, supporting the Fed’s continuation of monetary easing.

India drives up gold prices and smuggling

India’s gold imports for May were twice the monthly average of 2011 when it was a record year, according to Bloomberg. The government, as we reported earlier this week, are keen to clamp down on imports and have raised the import duty from 6% to 8%.

The All India Gems and Jewellery Trade Federation believe second-quarter inward shipments may fall by 20%. The WGC expects gold imports to be 300-400 tonnes for the same period, not too shabby given this is half of total shipments last year.

May’s gold imports to India were 20% of 2012 demand according to WGC data. Whilst the impact of raised import duties is expected to negatively impact demand how much so is unclear. Many expect the measure to increase smuggling rates, something which will not be beneficial for the government or society. The WGC believe the increase in import duty could ‘result in negative unintended consequences.’

China demand low for April

Yesterday we reported on China’s record gold demand in March, figures for April show disappointing demand as suppliers failed to keep up with the backlog of demand. According to Bloomberg calculations net imports from Hong Kong to China were 75,891 kilos, down from 130,038 in March, however imports were up 22% on April last year.

The acting director of the US Mint has said that he expects this year to be a record year for coin sales, should demand keep with the current pace. Following the gold price crash the Mint sold 209,500 ounces of gold in April, the highest amount since December 2009.

Yesterday’s Federal Reserve Beige Book release was closely watched by analysts in hope of characterizing the economy’s state and therefore what the FOMC would decide tomorrow. It showed ‘Modest to Moderate’ growth, yet another inconclusive indication as to what the FOMC will decide tomorrow.

Today both the ECB and Bank of England are set to hold separate rate meetings. Neither are expected to change stance, however comments (Sir Mervyn’s last) will be closely watched. Any indication from Draghi that the ECB is downgrading the Eurozone’s forecast will be bad for gold. A weaker forecast is likely given the data released yesterday which showed a fall in retail sales and weak PMI data.