The curbs trim a traditional seasonal support for gold just as Indian festive demand would normally pick up. That adds to pressure on prices, which have already been weighed down by rising expectations of further US rate hikes rather than lifted by geopolitical risk. Physical buying through jewellers is unaffected, so the hit to overall Indian demand may be limited, but the ETF channel has been a growing source of fresh investment flows. Oil remains the root cause: higher crude prices have swollen India’s import bill and weakened the rupee, so a sustained move in oil will shape how long the restrictions stay in place.
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India wants its citizens to celebrate Diwali with a little less gold, and the bullion market loses one of its more dependable autumn buyers.
Summary:
Kotak Mahindra, UTI and HDFC mutual funds are among those suspending bulk subscriptions to gold ETFs
The halt reportedly followed discussions with market regulator SEBI, and redemptions are unaffected
The move comes ahead of Dussehra and Diwali, the peak season for gold buying in India
The rupee has been pressured by higher oil prices and foreign equity selling, and gold and silver import duties were raised earlier this year
Gold imports fell to $1.8 billion in September from $2.3 billion in August
A bullion dealer called the move a precaution against an October import surge
Gold faces the loss of one of its most reliable seasonal supports after several large Indian mutual funds suspended bulk subscriptions to gold exchange-traded funds, just as the country enters its peak buying season for the metal.
Fund houses including Kotak Mahindra Mutual Fund, UTI Mutual Fund and HDFC Mutual Fund issued public notices late on Thursday halting bulk purchases of their gold ETFs, Reuters reported. The notices gave no reason, and redemptions remain unaffected. A mutual fund executive and two bullion industry officials told Reuters the move followed discussions with the Securities and Exchange Board of India, the market regulator. SEBI did not respond to a request for comment outside business hours.
The timing matters for gold. India is the world’s second-largest consumer of the metal and relies on imports for most of its supply. Demand typically rises around Dussehra in October and Diwali in early November, when buying gold is considered auspicious. Inflows into gold and silver ETFs surged during last year’s festive season as investors sought alternatives to lacklustre equity returns.
The underlying concern is the rupee. The currency has been under pressure this year from higher oil prices, which have swollen the import bill, and from heavy foreign selling of Indian shares. Strong gold demand has added to the strain, prompting the government to raise import duties on gold and silver earlier this year. Several fund houses also capped large gold ETF investments in June as authorities sought to curb imports.
The move appears pre-emptive rather than a response to a current surge. Gold imports fell to $1.8 billion in September from $2.3 billion in August. A bullion dealer at a private bank told Reuters that imports had not added to the trade deficit in recent months, and described the halt as a precaution against a jump in imports during October.
For the gold market, the curbs remove a source of incremental demand at a time when prices have already been under pressure from rising expectations of further US interest rate increases. Retail investors can still buy physical gold, so festive demand will not disappear. However, limiting large ETF purchases narrows one channel that has added fresh buying in past seasons.
The key questions now are whether other fund houses follow, how long the suspensions last, and whether India’s October import figures show festive demand shifting into physical gold instead.
This article was written by Eamonn Sheridan at investinglive.com.
