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Gold Recycling & Sentiment in India

Gold recycling in India is slowing down, just as the central bank declares its growing position...

INSTEAD OF Buying Gold as usual during the autumn festive and wedding season, reports Commodity Online from Mumbai, India's retail consumers are cashing in on their old gold in big way now.

The trend is obvious in the global research from London's GFMS consultancy. It reveals that the quantity of recycled gold in India climbed by 12.5% in the third quarter from the same period in 2008.

The reason for this? Heavy selling of second-hand jewelry by retail consumers at record Gold Prices.

According to GFMS, the London-based research firm, Indian refineries recovered 18 tonnes of gold in the third quarter ending September 2009, as against 16 tonnes in the corresponding quarter last year.

However, if compared to the first and second quarters this year, the recovery fell drastically, from 64 tonnes and 23 tonnes, respectively.

A report published in India's business daily, Business Standard, says this means retail consumers in India cashed in on their extra holding of the yellow metal when the price surpassed 15,000 Rupees per 10 grams in the first quarter.

Fearing that the metal may crash due to the lack of fundamental support, they continued selling additional stocks in the second quarter. In the third quarter, uninterrupted price escalation re-affirmed that the trend will continue to heat up, with Gold Prices perhaps targeting $1300 an ounce from the current level of $1167 an ounce on the international market.

During the third quarter, total gold supply for fabrication in India was 151 tonnes, over 47% less from 285 tonnes during the corresponding quarter last year, but 23% more than 123 tonnes during the second quarter this year.

Gold available for fabrication, however, plunged to 37 tonnes in the first quarter of the current calendar year. Similarly, gold imports for domestic Indian consumption fell 51% to 130 tonnes in the third quarter, as compared to 266 tonnes in the same quarter last year.

And while private Indian households rein back their gold selling, but remain cautious at these record high Gold Prices, the country as a whole is still bullish on gold, thanks to the Reserve Bank of India's much-publicized purchase of 200 tonnes of IMF gold in October.

Now reports say that India's Reserve Bank is still in talks with the International Monetary Fund (IMF) to buy another 200 tonnes of gold which the international body is ready to dispose of to fund its developmental projects.

Earlier in November India paid over $6.7 billion for its new acquisition, after which the global bullion market witnessed a bull run lifting the Gold Price above $1150 per ounce.

The fresh attempt by the Indian central bank has added to the soaring prices of gold and the metal set a new record on Tuesday this week.
At the time of the purchase of the first lot of 200 tonnes, the RBI had said it was part of its foreign exchange reserves management operations. But the Indian central banks is clearly on a spree to enrich its reserves and it wishes to hold a larger portion as gold rather than Dollars.

That was evident when India first bought the 200 tonne gold. In just three weeks after it bought the gold, India benefited by $800 million on the investment of $6.7 billion it made in buying 200 tonnes from IMF.

Since 1999 RBI has been periodically valuing its gold reserves at prices close to the market. It has not done so since it purchased the gold from IMF.

RBI bought the 200 tonnes at $1045 an ounce. The transaction, from IMF to RBI, involved daily sales that were staggered over a two-week period – October 19-30th – with each daily sale conducted at a price set on the basis of that day's market price.

Even so, prime minister Manmohan Singh – now on a tour to the United States – says there isn't a substitute for the Dollar yet.

"My own feeling is that we have not entered an era of irreversible shift in the economic strength of the US," he said ahead of his visit to Washington. And on November 3rd, the day RBI announced its IMF purchase, finance minister Pranab Mukherjee told an economic editors' conference that the government wasn't preferential in its treatment of either the Dollar or gold.

Buying Gold holds a sentimental significance for policymakers, however. The government had to pledge gold with the Bank of England in 1991 to borrow money to maintain imports amid the last major economic downturn. Buying Gold now signals India's return to strength, and its role as a major player in global financial affairs.

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Commodity Online is a leading online, print and content provider of news, information and research reports on the commodities sector. With offices in Mumbai, New Delhi, Ahmedabad, Cochin, Bangalore and Dubai, it also powers content in the SME sector, as well as the insurance and banking industries.

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