Steep discount in domestic spot gold to bank rate raises eyebrows

Spot gold was trading at an $18-25/ounce (approximately 31g) discount, against a typical premium of $1, for a record 40 days now because of a supply-demand mismatch driven by a sharp jump in price, rise in circulation of recycled gold, a trade pact with the UAE that facilitates import of the metal at lower duty, and suspected leakages, traders said.

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Gold of 99.5% purity has risen 10% in the past two months to ₹55,359 per 10g on 3 January, according to the India Bullion and Jewellers Association (IBJA), whose rates the Reserve Bank of India uses to price sovereign gold bonds.

The discount works out to a whopping ₹48,000-66,700 per kg based on Monday’s dollar-rupee closing rate of 82.75. Debajit Saha, lead analyst at Refinitiv Metals, pegged the discount at $25-30 an ounce, which he says has “distorted” the market.

A senior banker said that the discount would narrow in the second half of January.

“The discount is the consequence of low demand and ample supply in the spot market, which could start narrowing after 14 January,” said Shekhar Bhandari, president of global transaction banking at Kotak Mahindra Bank. “Aside from demand, import of gold at 1% less duty on account of the UAE treaty and recycled gold circulation are behind the discount.”

Only RBI-nominated banks can import gold into the country on a consignment basis. A consignment basis means ownership lies with the exporter until the agent (bank) sells it to an importer for a commission. RBI has authorized 16 banks, including Axis Bank, HDFC Bank, ICICI Bank, SBI and Kotak Bank, to import gold and silver for domestic use or for jewellery re-export in the current fiscal year (FY23).

Bullion dealers, refiners and organized jewellers buy this gold, the latter through a metal loan. Normally, there is a price mark-up after these constituents purchase the metal from the banks, which means that the gold in the spot market should trade at a premium to the bank rate. However, during periods of lean demand or economic slowdown, the spot price moves at a discount to the bank rate. This can be around $5-10 lower than the bank rate. Customers normally buy jewellery after enquiring about the gold rate from four to five jewellers.

Suvankar Sen, managing director and CEO of jeweller Senco, which is in the process of going public, attributed the discount to declining demand amid a sudden jump in gold prices, forcing bullion dealers to book profits by selling inventory purchased earlier at below the bank rate.

However, the quantum of the discount, given the imminent wedding season, foxed some traders.

“The steep discount of around $25 for such a long period is unusual,” said Surendra Mehta, national secretary of IBJA. “Any misuse or rise in the incidence of smuggling causing this should be plugged. To be sure, demand for jewellery at present is slack, but the persistence of the steep discount for this long is surprising, given that we will be soon entering the wedding season.”

Mehta added that the Comprehensive Economic Partnership Agreement between India and the UAE, in force since May last year, facilitated, among other things, import of the metal at a 1% lower duty which could increase the price disparity.