Smuggled gold has its own price in India

Gold merchants in the state of Kerala in India could be setting a trend of sorts with their dual pricing system. Two organisations in the Southern state are bringing out separate rates for daily sale at retail points. Market traders say the move is an upshot of the spurt in smuggling which has spawned a grey market for retail gold. The difference in rates also indicates the yawning demand supply gap and bristling competition among traders of the precious metal, and goes beyond being just a tool to attract customers.
The South Western state of Kerala boasts of a large number of reputed brands, with the state accounting for a sizeable chunk of the country’s gold market. Traders state gold holds a significant social status in the South Indian society. “Gold is used right from birth to death. Many people tend to add powdered gold to the honey that ends up in a newborn baby’s mouth, to ensure the child’s good fortune. At a funeral, mourners are wont to place a gold coin in the mouth of the deceased so that they are not without resources in the afterlife. These practices are not going to go away,” said Manish Kedia, bullion retailer.
Moreover, the million odd weddings celebrated each year in the state are yet another opportunity for the precious metal to shine. “Not offering gold as a wedding gift is a social mistake, a lack of taste. It damages your status and reputation in society,” said Kedia.
Dual price
In the new dual pricing system, the Kerala Jewellers Federation has put in place a new mechanism, called the Kerala Gold Board Rate, to determine the daily retail price. The rate, which would be higher than the market rate determined by a section of jewellers, is to depend on the price at which banks supply bullion to jewellers.
The board rate, which has come into effect from November 15, is supported by big retailer brands such as Malabar, Kalyan and Alukkas. Until recently, the rates were fixed by the All Kerala Gold and Silver Merchants Association, which claims to have about 6,000 outlets under its banner. The Association is to continue with its earlier method.
Earlier, the gold rates in Kerala were determined by a host of factors such as the London bullion rate, the value of the rupee and the rates adopted by banks, in addition to the local availability of gold. The Indian government’s many restrictions on the import of gold has made it extremely difficult for jewellers to get adequate supply from banks to conduct their business. Moreover, under the new guidelines, 20% of the imported gold has to be exported, which has led to jewellers adopting new mechanisms to get their regular supply at cheaper rates than those imposed by the importing agencies, said B Girirajan, president of the Association.
M Ahmed, General Secretary of the Federation said that the new official pricing mechanism had been adopted to counter the thriving grey market.
Ahmed, who is also the chairman of bullion retailer Malabar Gold and Diamonds added that jewellers were forced to adopt this option, without which legal gold retailing would almost go out of business.
“There is too much unequal competition as a result of the parallel market that can afford to sell bullion at cheaper rates. It is not just a difference of a few rupees. Sometimes, it goes to more than Rs 100 ($1.60) per gram ($50/oz)” said Mansoor Ali, bullion retailer.
Ali added that the government’s restrictions had led to smuggled gold entering the bullion market in a big way. “Though several jewellers tend to depend on old gold exchanged by buyers, others are forced to rely on this thriving grey market,” he added.
Ahmed added that the price difference to the dealer between smuggled gold and gold from the official route was around $6,412 (Rs 400,000) a kilogram ($200/oz), which tended to make the gold from the official route much higher. Given the huge price difference, traders said business has shrunk by more than a third.
Source:Bullion Bulletin

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