Indian gold tax effects

Hebba Investments writing at Seeking Alpha about India's war on gold and the unintended consequences - a more interesting story than most.

Watch the Rupee strength against the dollar because:

"depending on the amount of gold imported through unofficial channels, this policy may not even solve the CAD (current account deficit) problems experienced by the government because rupees will still be exchanged for other currencies to buy gold - it just will not be registered with government officials. One of the things investors should do is to keep an eye on the rupee-dollar exchange rate, if it continues to weaken that may be a sign that government policies are not working and large amounts of gold are still entering India through illegal imports.

In the meantime I haven't made any changes to my portfolio - some of the losses have lessened and I haven't got the money or the will to add any more at the moment.

Another identity crisis at gold ETF Investor - fund or ETF?

This blog has had an identity crisis before.

There was another one last week: why do I invest in a fund rather than an ETF when it comes to gold mining companies? I only asked myself this question after seeing a piece on gold miner ETFs in Moneyweek - the inconsistency hadn't occurred to me before!

Fear mismatch? 10 month low for Sterling gold ETF not 4 month

I suppose this should be seen as a good thing -another proper buying opportunity for gold. But the reason it's a buying opportunity is because it's scary and I'm not immune to that fear.

However there is a mismatch, the media chat about impending huge falls in the gold price is nothing like it was back in December 2011 - at least not yet - but I think it's because in dollar terms the lows still aren't below the December 28 $1,523 low.

Indian gold ETF sees first conversion of shares into gold

"Last week, we also made a first physical delivery of gold against the ETF. Ashok Dhamnaskar, an investor from Mumbai, has become the first investor to convert gold ETF units to physical gold on Thursday, April 12, 2012.” Nitin Rakesh, CEO of Motilal Oswal Asset Management told Business Standard on April 18.

Indian Gold ETF that swaps shares for gold boosted by festival

The amount of gold sold during yesterday's gold buying festival in India was a disappointment according to Reuters: Prices, inflation dent gold demand on Akshaya Tritiya

That was in the traditional physical markets. But sales in the physical gold ETF market soared as trading costs were waived. The biggest percentage rise (although from a lower base than its larger peers) was seen by the only ETF that gives its investors the option to convert ETF shares into gold.

Indian Gold ETFs promoted as jewellery demand drops

Physical demand will drive the price of gold but news from India - the largest and most watched market is not entirely encouraging.

While the Akshaya Tritiya festival will lift jewellery demand, analyst Marc Ground at Standard Bank said "the pace of demand is not to the extent that we expected" (reports BullionVault)

But financial gold could still get a boost as the Indian gold exchange traded fund market continues to grow fast and India's National Stock Exchange will reportedly waive transaction fees on physical gold ETFs and extend trading hours on April 24.

It happened in May last year and again in October, the latter prompting the heaviest gold ETF buying day ever on the exchange.

Despite expectations that new taxes and higher gold prices will dampen demand some ETF providers expect more people to use ETFs.

New gold ETF gives retail investors access to real gold

A new physical gold ETF launched last week allows retail investors to turn their gold shares into 10g gold bars for 750 rupees (£9/$14) fee. It's only available in India but would an ETF like this work in the UK?

Gold gains more than 1% but will it continue?

The gold price gained more than 1% this morning. It's a bit unnerving for someone waiting on the sidelines hoping the gold price will fall far enough to justify selling in December.

But here's what seems to be happening today: the euro rose against the dollar but commentators tell Reuters it's not a longterm trend and Indians started buying gold again (Reuters again).  I try to get my head around both of these issues below  - the Indian buying story may not be a longterm one yet either.

But it seems no one really expects much real movement on Europe until the results of Spanish and Italian bond auctions on Thursday and Friday. Is there any reason to buy gold before then?

Well the gold price shot up today:

The gold ETFs I do not own gained too -

As the falling dollar played a big part in the gain any changes in the pound sterling denominated PHGP looks a bit less impressive/painful and these are the changes you'd get if you owned PHAU, the dollar version anyway - which is what I'd buy. The Bloomberg dollar index chart shows the dollar moving lower. (Reuters said this was due to short covering on the euro:"Traders said there was no fundamental reasons for the short squeeze in the euro with news out of Europe continuing to paint a dreary picture.")

The pound moving in the same direction as the euro - up today (the green figures above the chart) but moving downwards over the last month (the chart). It's opposite relationship to the dollar is likely to get stronger? (Reuters story: )




Adding to a list of gold watchers who think the price of gold is more likely to fall than rise in the short term appears to be Perth Mint's Bron Suchecki (also Gold Chat) whose negative views included the effect of MF Global: "This is not necessarily negative in the long run, as these investors may instead opt for direct physical investment, but in the meantime any contraction in leveraged paper positions puts pressure on the gold price."

The other key factor he cites is Indian gold demand: "Physical Indian ounce demand will return eventually but in the short run the situation  continues to be negative, with Reuters reporting Prithviraj Kothari as saying "Still prices  are high. Interest rates are high. Liquidity is tight. I think imports in the first quarter of  2012 will be 50 percent lower than last year."

Although he adds that there is some pick-up of bar demand and that a change, when it comes, will be very fast.

Just this morning Reuters said dealers in Mumbai said a drop in local prices to a one-week low was used to stock up ahead of wedding season beginning later this month. Harshad Ajmera, proprietor of JJ Gold House in Kolkata said: "Buying will continue until March."

It also said India's central bank has allowed four more banks to import precious metals which would boost competition and help reduce premiums.

In the same report Reuters quotes Macquarie analyst Hayden Atkins who said "A big part of the weakness into the end of the year was people taking profits and liquidity being a bit lower."

He said that the end of this process might explain why an inverse correlation between the dollar and the euro/gold.

"I would expect that to unwind, and maybe that's why we're seeing stronger gold even when the euro is tending to weaken. You don't have that length there any more." He told Reuters he expected gold's inverse link to the dollar to drive prices in this year.

Gold investors: support competitive pawnshops

Sweeping reports on the global gold market can be too slick for investors like me to get their heads around. But I want my gold exchange traded fund investment (PHAU) to have a foundation in something that I can see for myself. This might be an unrealistic aim but I'm trying.

So far...

When I checked my local gold market on the Narroway in Hackney Central the pawnbrokers offered better prices for scrap gold than the jewellers.

That was all I could squeeze out of my first aimless mission. Then a foray south into Tower Hamlets found muslim gold owners breaking their religious code to pawn their gold.

What next?

If my local gold market is dominated by pawnshops are they offering a good deal? A possible lead came from the BBC report on the gold buying season in India by Delhi reporter, Mark Dummett, for BBC Radio 4's The World Tonight.

Dummett talked about the big business of lending against gold in India and one successful example of a company that does it: Muthoot Finance.

Muthoot, which listed on the Bombay Stock Exchange in May, also opened its first store in the UK last year in the heart of London's Indian community in Southall, in west London. In the UK it charges interest rates between 5.99% per month (for loans between £20 and £199) up to 2.5% (for loans above £3000).

Taken at face value these rates look far better than the 8% per month offered by pawnshops in most other UK high streets.

That's what I was offered at a Money Shop in Bethnal Green - (I couldn't find the rate on its website) and it's the going rate at H&T, a publicly listed UK pawnbroker which explained the deal in its full year results published in March 2011.

H&T said that 95% of the collateral for its loans was gold jewellery, precious metals and/or diamonds. It said: "The pawnbroking contract is a six month credit agreement bearing a monthly average interest rate of 8%."

It also said that if a customer "does not redeem the goods by repaying the secured loan before the end of the contract" it will "dispose of the goods either through public auctions... or the Retail or Scrap activities of the Group."

Since last year there seems to have been a monumental rise in the amount of people failing to collect their items. The group reported scrap profits from "items forfeited from the Group's pledge book contributed £9.0 million (to profits) in 2010" compared to £2.1 million in 2009. However I'm not sure if those figures should be taken at face value (there was some kind of technical postscript).

This looks interesting. My guess is that most of this reclaimed gold will not be recycled as jewellery in the current climate because there are too few buyers (that's what Hackney jewellers were saying).

So what happens to this gold? Does it re-enter the financial system where investors like me buy and sell depending on the price but have no real demand or desire for the metal itself?

May be it would be better for gold investors if people who owned it kept hold of it - even if it remains in a pawnshop's safe. That's not likely to happen while loan rates remain so high. The double disadvantage for anyone pawning their jewellery is that they only get scrap value (weight) and if they want to replace it they'll have to pay the premium for craftsmanship as well as the spread on the gold price.

Before getting too excited about the Indian invasion this isn't a massively well researched piece and although I've put in some questions to the companies mentioned, none have got back to me.

Back to the slippery global picture, the current high price of gold is not expected to deter Indian retail buyers (the biggest demand for gold).

But some Indians think gold loan firms like Muthoot are selling their deals too hard and I haven't checked what the rate of 'forfeit' is for Muthoot - although a lower loan rate is likely to help.

ETF relevance?

I need to get a picture of how important the scrap market is to the global price. In its 2010 Gold Survey analysts at GFMS, a precious metals research agency, said there were three sources of supply in the global gold market.

The first was mining which accounted for 2,572 tonnes in 2009 and the second was scrap at 1,674 tonnes (39% of total supply) with central bank third and only accounting for 41 tonnes.

GFMS analysts said that the supply of scrap gold increased significantly in 2009 in North America and Europe. "Much of this growth was a result of heavy promotion by an improving network of scrap collectors, who made great use of consumer's need to sell unwanted jewellery to raise cash in a challenging economic environment." Read H&T's results to see how they cashed in on this with their "gold bars".

The question is how much of the "unwanted jewellery" was really unwanted and whether that supply would have been less if consumers were offered better deals?