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Gold demand stifled in top buyer by prices, laundering curbs

A crackdown on money laundering and a revamp of the taxation system in India has soured the outlook for gold demand during the festival season, which is normally a peak time in the market.

Dhiraj Singh/Bloomberg

Rising gold prices and government measures to enforce compliance in the Indian jewellery industry are deadening demand in the world's second-largest bullion market at the start of the traditional festival season when buying usually explodes.

"If you ask me, I wouldn't purchase gold even if it was Diwali," Prathamesh Mallya, chief analyst at Angel Commodities Broking, said by phone from Mumbai, India, referring to the Hindu festival of lights. "A lot of things have been happening across the globe that have been pulling up prices. And if North Korea sends another ballistic missile next week, you will see prices rising again."

Bullion has climbed almost 10 per cent on the Indian market this year as world prices increased on global tensions and reduced chances of a further hike in U.S. interest rates in 2017. In India, a crackdown on money laundering and a revamp of the taxation system have roiled the industry. That's soured the outlook for demand during the festival season, which peaks around the time of Diwali on Oct. 19, when gifting of gold jewellery is considered auspicious.

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Global prices are up 16 per cent this year and touched $1,357.61 (U.S.) an ounce last week, the highest in more than a year. A strengthening rupee has curbed increases on the local market, but with overseas prices expected to climb to $1,400, the cushion for Indian customers will not be much, Mr. Mallya said. Most-traded gold futures settled at $1,328 in New York on Wednesday.

Buying has been slow as jewellers and consumers grapple with the new nationwide goods and services tax, which replaced a variety of state duties. The government also brought the jewellery industry under the Prevention of Money-Laundering Act, which increased compliance requirements. In 2016, demand slumped to a seven-year low because of a cash shortage after the government withdrew high-denomination notes to curb the black market.

"I'm a little confused as to how things will roll out in the next two to three months. We have too many issues with the money laundering act, where they have included jewellery, and then you have the GST," Ranjeeth Rathod, managing director at importer MNC Enterprises (P) Ltd., said by phone from Chennai. "The next six months will be very quiet."

Stockpiles in local markets remain high, and imports will slow from this month after surging in the first half of the year, Mr. Rathod said. Overseas purchases jumped more than 2 1/2 times to 625.5 tonnes in January to July from a year earlier, according to data compiled by Bloomberg.

"Being a chairman of the jewellery association, I never speak negative, but this time I am bound and compelled to give negative remarks," Nitin Khandelwal, chairman of the All India Gems & Jewellery Trade Federation, said in an interview. "Demand is negligible because the sentiment of the jewellers and customers is not good."

While there will be some gold purchases during Diwali because crops have been good, and marriages can't take place without jewellery, all the trade and consumers are confused by the different compliance policies the government keeps issuing, Mr. Khandelwal said.

There's ambiguity on the documentation needed to track purchases and on the cash limit above which documentation is required, he said. "I'm not selling arms or ammunition that I have to disclose all details," he said. Furthermore, the majority of the industry is unorganized and most jewellers don't have computers, so "how will they keep records and give the information to the authorities?"

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