Gloom to Boom: Gold Gets Sparkle Back for India's Festivals

(Bloomberg) -- Until early this month, Indian jewelers expected the traditional surge in gold demand from the Hindu Festival of Diwali to be muted.

The industry was struggling to cope with a slump in sales caused by a government crackdown on the black market, and efforts to increase financial transparency. In August, jewelers were dealt a fresh blow by a decision to bring them under the Prevention of Money Laundering Act -- a move they likened to being bracketed with those selling arms and ammunition.

Vigorous lobbying persuaded the government to reverse the decision, freeing customers from a requirement to provide their tax identity for every purchase above 50,000 rupees ($772). While the move will be reviewed, the backtrack lifted the mood and brought a positive change in sentiment before Diwali this week, according to Metals Focus Ltd.

“It’s a good thing for the market that there’s a government who is ready to listen,” said Chirag Sheth, a Mumbai-based analyst at the precious metals research firm. “The implementation of the rule was cumbersome for the trade.” Purchases in the two weeks that run up to the Dhanteras festival on Oct. 17, two days before Diwali, usually total 20 to 30 metric tons and they may now be higher because of this latest shot in the arm, he said.

Dhanteras is the biggest and most auspicious day of the year to buy gold. While the three months through September were a “washout” in terms of demand, with the money laundering curbs damping purchases during the seasonal monsoon, sales for the full year are seen recovering 5 percent to about 700 tons from 2016, said Sheth. Last year was the worst for demand since 2009.

Shares of jewelers climbed in Mumbai on Monday. Titan Co. added almost 1 percent to 631 rupees, Gitanjali Gems Ltd. was up as much as 1.9 percent and Tribhovandas Bhimji Zaveri Ltd. gained as much as 2.3 percent.

But clouds over the Indian gold industry haven’t been swept away entirely, and will almost certainly be a subject of discussion at the London Bullion Market Association conference in Barcelona, also taking place this week.

Strict Records

“The 50,000 rupees limit has been removed by the government, but we are again waiting as they may come out with a new ceiling,” said Ketan Shroff, joint secretary at the India Bullion and Jewellers Association Ltd. The industry has been spooked by repeated government interventions, and jewelers will have to be strict at maintaining records of sales “because the scrutiny may come anytime at a later stage,” he said.

Prime Minister Narendra Modi last year banned higher denomination notes to bring unaccounted cash back into the system, introduced tougher proof of identity for purchases, capped the amount of cash used in transactions and introduced a new national goods and services tax in July. Adapting to these changes have kept buyers and the industry busy.

“Consumers have had to contend with a hell of a lot of changes in the last year,” Simona Gambarini, a commodities economist in London at Capital Economics Ltd., said by phone from London. “Modi seems to be introducing new regulations every month. It’s bound to impact demand.”

Buyers like Swapnali Kansara, a 43-year-old airline employee in Mumbai, now insist on receipts for their purchases. “I keep all my bills because you never know when you will be asked to show them to the authorities.”

Gold Coins

Kansara has been buying gold coins or jewelry during the festival season for years, a tradition she shares with many Indians. “While my husband considers it a dead investment because we never sell our gold, he lets me buy every year because he knows of my love for it.”

Indians will continue to make their traditional token purchases, Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities Ltd., said from Hyderabad. Galipelli himself will be queuing up on Dhanteras to pick up gold coins for his wife. “I am looking at a comfortable 20 percent appreciation in prices over the next year,” and the current levels are right for investors to buy, he said. Gold prices in India are down about 8 percent from last year’s high.

As for Barcelona, an overlap with the busiest period in the calendar for the Indian industry has seen many participants skipping the LBMA conference this year. “Looks a bit difficult for everybody this time because of Diwali,” said Saurabh Gadgil, chairman of Pune PN Gadgil Jewellers Pvt Ltd., who has attended for several years, but will be absent this time.