India gold prices back at discount; Chinese buying up on yuan slide

Mumbai/Singapore, January 8

A rally in gold prices this week curbed demand in key consumer India and sent local prices to a discount to the global benchmark for the first time in three weeks, while a tumble in yuan underpinned demand in top buyer China.

Gold prices rose four per cent this week on worries over the Chinese economy and escalating geopolitical tensions. They hit a nine-week high today, before giving back some of those gains.

Dealers in India — the world’s second biggest gold consumer — were offering a discount of up to $3 an ounce to the global price for the first time since December 17. Last week, prices were at a premium of up to $1.50.

“People are delaying purchases expecting a correction in prices,” said Daman Prakash Rathod, a director at MNC Bullion, a wholesaler in the south Indian city of Chennai. “Retail demand is very poor.”

Even before price rally, Indian demand was tepid. Earnings of millions of Indian farmers have been squeezed by the first back-to-back drought in nearly three decades. Rural demand accounts for about two-thirds of India’s total consumption.

Demand has been sluggish since the Diwali festival in November and it is unlikely to improve unless prices slide sharply, some dealers said.

“Some traders are clearing low-cost inventory they built during December. Even after offering discount, they are making huge profits,” said a Mumbai-based dealer with a private bank.

In China, the price rally did not deter buyers as it came at a time when the central bank allowed the yuan currency to fall sharply.

“There is a cap of how much foreign exchange the Chinese can buy or sell. So some people might hedge the weaker yuan by buying gold,” said a dealer in Hong Kong.

The People’s Bank of China allowed the yuan’s biggest fall in five months on Thursday, sending shivers through regional currencies and global equities. However, today, the central bank raised its guidance rate for the currency for the first time in nine trading days.

Premiums on the Shanghai Gold Exchange, the platform for all physical gold trade in China and a good indicator of demand in the country, held at a healthy $4 to $5 for most of the week. They fell to about $2 to $3 today due to the stronger yuan.