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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Gold Prices Under Pressure As Indians Stop Buying

India’s government wants more local gold. This week directing state-run Minerals Exploration Corp. to assess remaining reserves at the historic Kolar Gold Fields district — ahead of a possible re-start of this legendary producing region.

But reports from elsewhere in the country this week suggest gold buyers are continuing to vanish from the market. With one particular group of industrial consumers showing some surprising figures on demand.

That’s India’s gold refiners. A sector where local press reported capacity rates have fallen to 25% — showing that a full three-quarters of gold refining output has been idled in recent months.

The situation is so dire that refiners are apparently looking at a big round of consolidation — needed in order to stay in business as profits dwindle.

So why all the financial problems? Apparently, it’s a lack of gold imports.

Many of these Indian refiners use dore gold as an input — a form of half-finished bullion that often comes directly from mine sites, rather than from end-user refiners in countries like Switzerland.

Up until recently, imports of dore into India enjoyed preferential tax treatment — being charged a rate of only 8%, as compared to 10% for fully-finished gold.

That led importers to bring in growing amounts of dore, giving a steady supply of feed to local refiners. As the chart below from a recent World Gold Council study shows, India’s dore imports grew by an astounding 896% between 2012 and 2015.

 

But 2016 brought big changes. With India’s government increasing the import tax on dore to 8.75%.
That, combined with other charges, has made dore imports largely unprofitable — resulting in a major drop-off in supplies, and a lack of feed that has pushed refiners to today’s incredibly low utilization rates.

That’s an important observation for the gold mining industry. With dore buying from India having represented a significant source of direct-from-mine purchases over the last few years. Benefitting miners in places like Ghana, the Dominican Republic and Peru.

The current reversal in dore buying could leave some of these producers in the lurch. Watch for miners in these places looking for new buyers — and to see if this shift affects overall global gold demand.

Here’s to moving on.

By Dave Forest

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