Gold Buying Rebounds in India on Diwali Jewelry Sales

Shweta Anand took half a day off work to get a jump on India’s jewelry shopping spree before the Hindu festival of Diwali, and she was looking for bargains.

“The best time to buy is before the shops get crowded,” said Anand, 27, as she eyed trinkets on velvet shelves at a store in Mumbai’s Zaveri Bazaar, India’s biggest jewelry market. “I buy some gold jewelry every Diwali. Last year, I bought earrings. This time, I am getting a chain as prices are lower.” She spent 30,000 rupees ($490) on a necklace.

Even after a two-week rally in bullion, domestic prices remain 7.4 percent lower than a year ago just as sales are set to climb for the festival and wedding season. India is the largest gold buyer after China. The All India Gems & Jewellery Trade Federation said fourth-quarter imports of the metal may jump 75 percent, which Barclays Plc said may support prices.

“The appetite for gold among physical buyers in India seems to have increased,” said Howie Lee, an investment analyst in Singapore for Phillip Futures Pte. “India’s attachment to gold is unlikely to break. This tradition has lasted for centuries. It’s a symbol of wealth or a form of investment, and the precious metal is deeply rooted in worship and culture.”

Photographer: Dhiraj Singh/Bloomberg

A salesperson shows a gold bangle to a customer at a jewelry store during the festival...Read More

After import restrictions and a weak rupee led to a 34 percent drop in demand in the first half of 2014, purchases are set to improve in India, the world’s largest buyer as recently as 2012. Retail sales of everything from rings to pendants to necklaces may rise 30 percent to 40 percent during Dhanteras, the biggest gold-buying festival, said Rajesh Exports Ltd. (RJEX), a jewelry retailer and exporter. Dhanteras is celebrated today.

Demand Recovery

Diwali, the festival of lights celebrated by the country’s more than 800 million Hindus on Oct. 23, is considered an auspicious time for buying gold. Researcher CPM Group estimates the holiday generates about a fifth of annual purchases in India, more than any other time of year in a country with a long history of hoarding the metal. About 20,000 metric tons of gold are stashed in homes and temples, and Indians often inherit bullion in the form of ornaments or family treasure.

Jewelers in India, which represented 25 percent of global bullion purchases last year, are betting demand will be rekindled by four straight quarterly declines in domestic prices, the longest slump since 2004. The premium jewelers pay to suppliers over London prices has plunged to about $17 an ounce from $120 a year earlier, cutting costs for consumers.

Buying Surge

“Prices have fallen at the right time,” said Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, which represents more than 300,000 retailers and bullion dealers. Domestic demand will rise 15 percent to 20 percent over the three months through December, with imports reaching 175 tons to 200 tons, compared with 114 tons a year earlier, Bamalwa said on Oct. 15.

Gold traded in London touched $1,183.24 an ounce on Oct. 6, the lowest this year. Prices have tumbled 28 percent in the past two years as the Federal Reserve signaled an end to stimulus measures intended to revive the U.S. economy, while inflation remained in check. Even as low prices fueled a surge in physical demand in China, the appeal of the metal as a hedge has waned for investors. Holdings in exchange-traded products backed by gold have dropped 12 percent in the past year, helping to erase about $13 billion of value.

Bullion for immediate delivery traded at $1,248.04 today, while futures on the Multi Commodity Exchange of India Ltd. were at 27,551 rupees per 10 grams ($1,397 an ounce).

More Imports

In India, signs of a rebound in festival demand emerged in September. Bullion imports were valued at $3.75 billion last month, 450 percent more than a year earlier, the Commerce Ministry estimates. Shipments jumped as jewelers replenished reserves to meet demand, said Bamalwa, the federation director.

Indians purchase gold at festivals and for marriages as part of the bridal trousseau and as gifts in the form of jewelry. Demand will be 850 to 950 tons this year, compared with 974.8 tons in 2013, the World Gold Council estimates. An average of about 5 million weddings every year fuels demand for gold, regardless of prices, according to Prithviraj Kothari, managing director of Riddhisiddhi Bullions Ltd. in Mumbai. He estimates average purchases for a wedding at about 200 grams.

The increase in demand from festivals and the wedding season “alongside the potential for a short-covering rally could see gold extend its gains,” Barclays said Oct. 13. “We believe the bounce is likely to be short-lived and remain cautious given the headwinds the macro-environment presents and would look for opportunities to sell into the rally,” it said.

Insatiable Appetite

The public’s insatiable appetite for gold raised concern for the government because almost all of the metal is imported, widening the current-account deficit and weakening the rupee. India last year raised import taxes three times to 10 percent and introduced a rule obliging shippers to supply 20 percent of their cargo to jewelers for re-export.

The import curbs sent gold demand for jewelry and investment down 34 percent to 394.4 tons in the first six months, World Gold Council data show.

After the curbs throttled imports and cut the deficit to about $32.4 billion in 2013-2014, compared with a record $87.8 billion a year earlier, the government in May eased controls to allow more trading houses to bring in gold. The government may consider re-imposing some curbs after Diwali as imports surged in the past couple of months, Finance Minister Arun Jaitley told ET NOW television yesterday, the Press Trust of India reported.

Asian Buyers

Cheaper bullion may spur buyers in Asia, according to UBS AG. Prices at or below $1,200 will attract physical buyers and be seen as favorable by investors, UBS analysts Edel Tully and Joni Teves said in a report on Sept. 30. A rush to buy will not materialize unless prices fall closer to $1,100, they said.

Demand in Asia has declined this year after jumping in 2013, when global prices plunged 28 percent, the most in three decades. Consumption fell 16 percent in the second quarter to 963.8 tons, the World Gold Council estimates. While China was the top buyer in 2013, demand in the three months through the end of June fell 52 percent to 192.5 tons, less than the 204.1 tons purchased in India, council data said.

The metal will extend losses into 2015 as the dollar rallies, Morgan Stanley said on Oct. 8, listing the commodity among its least-preferred metals. Average prices will decline each quarter, reaching $1,165 in the three months through September, the bank said.

Jewelers are also hoping that steps taken by Prime Minister Narendra Modi, who was elected in May, will help revive growth in Asia’s third-largest economy and provide a boost to sales.

Harvesting Gold

“There’s a positive feeling in the economy after the Modi government came to power,” said Rajesh Mehta, chairman of Bengaluru-based Rajesh Exports. “For a reasonably long time, demand was subdued, and that pent-up demand will come in now at these price levels.”

A good crop will also help gold demand in India, where 833 million of the 1.2 billion population depend on agriculture for their livelihood. Rural India represents 60 percent of the nation’s gold consumption. After a weak start to the monsoon season, which limited planting, food-grain output will be 120.3 million tons compared with 129.2 million tons a year earlier, the Agriculture Ministry estimates. Cotton production will jump to a record 40 million bales of 170 kilograms each.

For Lynette D’Souza, a 30-year-old dentist in the western Indian state of Goa, the lower gold price means she can buy more with the 100,000 rupees she’s budgeted on a gift for her brother, whose wedding is scheduled next month.

“I was initially planning to gift my brother a honeymoon package to Southeast Asia, but I realized that people don’t value other gifts as much as they value gold,” D’Souza said in an interview on Oct. 14. “Years from now, they will still have the gold. It is also an investment.”

To contact the reporters on this story: Swansy Afonso in Mumbai at safonso2@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net Thomas Kutty Abraham, Steve Stroth

Sovereign doom loop haunts EU bank stress tests | Mitch Cator Investing Blog

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone’s nascent banking union was supposed to unpick the “sovereign doom loop” by which ropey banks endangered weak countries, and vice versa. Its first task was to be a rigorous test of how much capital each lender could count on in adverse scenarios. Yet the new single banking supervisor’s exercise could tighten, rather than loosen, the state/bank co-dependency.

The tests, scheduled for release on Oct. 26 with input from the European Central Bank, will subject the monetary union’s lenders to a generic macroeconomic shock. They will be required to show that their core Tier 1 equity afterwards would amount to at least 5.5 percent of their risk-weighted assets. But the ECB’s single supervisory mechanism, which will directly regulate large European banks as of Nov. 4, has acquiesced in making this “pass” mark easier, according to a person familiar with the situation.

The fudge concerns deferred tax credits, or money governments owe the banks when they have booked losses in previous years. National regulators in Europe have found a way around Basel III capital rules that require a variant of these, so-called “deferred tax assets,” to be phased out of a bank’s capital count by 2018. DTAs generally only kick in once a bank becomes profitable again – so they shouldn’t be viewed as loss-absorbing capital.

Tax credits, on the other hand, are due whenever a bank needs them. Italy, Spain and Portugal have already shifted many DTAs into various types of DTCs. Greece is following suit. That can be a significant boost for the banks: DTAs make up over 15 percent of Portuguese lenders’ capital on average, and 30 percent-plus of some Greek banks.

Allowing DTCs not only weakens the test’s credibility. It also restores the tie between sovereigns and their banks. True, in some cases, attempts are made to safeguard the governments’ finances by allowing them to take an equity stake in the stricken lender. But as the ECB itself warned in a pointed opinion note on Sept. 3, it would be healthier if banks raised the capital they need privately. Given that the central bank’s SSM offshoot is the European banking regulator in waiting, it has the power to impose tougher rules on prudential grounds if it wanted to. It hasn’t.

Two factors point to why. One is that at the moment, the ECB is torn between its two partly conflicted roles. As banking supervisor, it must be tough on capital. As central bank, it fears deflation and wants to boost lending in the euro zone – which will be hard if capital needs push banks into a new wave of deleveraging. There is a theoretical Chinese wall between the board of the SSM and the ECB’s governing council in charge of monetary policy, but it would be odd for the former to further complicate the job of the latter – especially as there is some overlap between the two in terms of personnel.

But there is another problem. Although the 23-strong SSM board is chaired by the tough-talking Daniele Nouy, 18 of its members are representatives of national regulators. They either already accepted DTCs as capital, or are likely to acquiesce in return for concessions that could help their own banking system.

The SSM’s overall “comprehensive assessment” should still be a step forward. A pan-euro zone definition of bad debts should at least make the denominator of the capital ratio credible – and comparisons possible. And once the test is done, the new supervisor could still slap extra capital requirements on banks that gorged on DTCs.

Yet any attempts to toughen up will still have to get past the SSM board. And by allowing banks to hold “capital” that rejoins them at the hip to their own state, the stress tests will be less meaningful than they could have been. Worse, investors could continue to treat them with suspicion.