There is always more to precious metal markets than meets the eye at first. In India, the premiums on physical gold are skyrocketing. Most of this can be attributed to supply line issues and a lack of smuggled bullion.
Gold Supplies in India run dry
Following the COVID-19 lockdown measures, numerous industries have been disrupted for an extended period of time. This includes the supply of gold and other precious metals. Demand for physical metals has dropped globally, yet acquiring the materials has proven very cumbersome. In India, this is leading to rather hefty premiums for physical gold delivery.
It is not the first time this year that physical gold premiums have become apparent. Nor will it be the last time, by the look of things. Primarily in India, this situation could potentially grow a lot worse in the weeks and months to come.
Finding the culprit for this premium price is not overly difficult. Importing gold to India has decreased by 86% when comparing June 2020 to the year prior. An increase in gold price has affected imports in an unexpected way. The ongoing ban on international air travel is a bigger culprit. Given the current COVID-19 concerns, those restrictions may not be lifted anytime soon.
Interestingly enough, the demand for gold in India isn’t as high as other places. Despite the lower demand, meeting requests is still nearly impossible. Charging a premium is the only option for dealers, until imports – and oddly enough, smuggling of gold – returns to its normal levels in the future.
Current premium prices are as high as $3 an ounce, which may not seem like much. However, prices in India also come with a 12.5% import tax and 3% sales tax. As such, the current prices are very different compared to the rest of the world, making any premium pretty steep.
Buying Discounted Gold in China
The situation in India is rather unique, especially when comparing it to China. In that part of the world, gold is being sold at a discount, instead of a premium. Remarkable, to say the very least, yet it appears that gold demand in China is even weaker than India right now.
Current discounts range anywhere from $0.5 per ounce to $25 per ounce. That is a quite steep discount, although no one knows why physical gold is being sold at such a discount right now. Nothing prevents gold dealers from stockpiling the gold for a later date. This may indicate that liquid capital is in very high demand right now, raising more questions regarding China’s economy.
One also has to question how gold price expectations will factor into all of this. More specifically, more and more people believe that gold will surpass $1,900 an ounce in the near future. Keeping that in mind, one has to wonder why any dealer would sell at a discount right now.