Bullion Cues. Raising the quality bar on gold

Gold prices may be inching up again, but there’s good news for Indian jewellery buyers in the form of higher quality standards for their jewellery purchases.

Last week, the Bureau of Indian Standards (BIS) Bill figured among the half a dozen pieces of legislation passed by the Parliament.

This Bill has significant implications for gold buyers as it has empowered the Centre to make the hallmarking of precious metals, including gold and silver jewellery, mandatory. Estimates suggest that only 30-40 per cent of the gold jewellery sold in India is hallmarked.

The law also empowers the Centre to punish retailers who violate its rules with a fine of up to 10 times the value of the gold, or imprisonment for up to two years.

A World Gold Council study notes that gold jewellery in India suffers from under-caratage of anywhere between 10 and 15 per cent. Therefore, every time a consumer is sold gold that is not of promised caratage, he suffers a monetary loss.

Say, you buy a piece of jewellery which you are told is 22 carat, but is actually 18 carat, your loss would be ₹500/gram (based on gold rate of 22 carat gold in Chennai at ₹2,797, against 18 carat at ₹2,244).

With hallmarking made mandatory, if you find any of your hallmarked jewellery to be of lower caratage, you can complain on the BIS website and ask for a replacement.

A hallmark sign consists of the BIS Mark, the fineness number (916 for 22 carat gold; 875 for 21 carat; 750 for 18 carat), the assaying and hallmarking centre’s mark, the jewellery identification mark and the year of making denoted by a code number. Hallmarking of gold jewellery in India was started by BIS (the Bureau of Indian Standards) in 2000.

The BIS has over 300 centres and 13,000 plus jewellers today hold a BIS certificate.

But as hallmarking is not mandatory and not all consumers know about it, a lot of fraudulent selling of under-caratage gold has continued. However, with the BIS Act amended now and the Centre getting powers to make hallmarking of precious metals mandatory and punish errant jewellers, the process could get a leg-up.

Quite apart from an external quality, the hallmarking requirement may have another big impact on gold too. Today one of the main reasons for Indian households’ appetite for gold, even during periods of skyrocketing prices, is that the metal serves as a store of value that can be exchanged for money in hard times.

But when consumers hold gold of lower purity, they face difficulty in monetising it. Of the 20,000 tonnes or so of gold estimated to be held by households, only about 600 tonnes is monetised thorough loans, says a study. With hallmarking becoming mandatory, the loan value that buyers can expect from such transactions may improve too.

In the domestic market, the jewellery industry continued its strike asking for withdrawal of the 1 per cent excise duty on gold jewellery announced in the Budget.

With many retailers shut across the country for more than 10 days, demand in the physical market has dried up. The dealers’ ask price is at a discount of $45-45/ounce to international prices. Jewellers hoped that the Centre will reduce import duty on gold in the Budget, but instead there has been this additional excise levy. Some of this negativity in the gold markets has reflected in futures trading too. MCX gold was down close to 1 per cent last week and ended at ₹29,500. Rupee was very stable against the greenback and ended at 67.05.

This week, MCX gold may again try to move up to break the resistance around ₹30,100-30,160 levels. If the contract does that successfully, the next target would be ₹30,500.

MCX Silver managed a smart rally last week despite international prices being weak. It ended at ₹37,610, up about 2 per cent from the close in the previous week. If the momentum continues, the contract may hit ₹38,800 this week if resistance at ₹38,000 is crossed.

With the euro gaining against the dollar and the latter losing sheen, international gold prices got a leg-up last week. It hit a high of $1,285/ounce and finally closed at $1,250.7/ounce, down 0.6 per cent for the week.

ECB announced a massive expansion in the stimulus for the euro zone (80 billion euros a month from the earlier 60 billion euros) last week. It also cut the refinancing rate to zero. While the stimulus news added pressure on euro, later, ECB President Mario Draghi’s indication that there will be no further rate cuts helped the currency rally up against dollar.

This week, there are a lot of key data releases in the US, so trade with caution as ther may be increased volatility. It starts with retail sales data on Tuesday followed by CPI, housing starts and industrial production on Wednesday.

Federal Open Market Committee meeting announcement is also scheduled for Wednesday and the market is expecting some direction on rates. On Thursday is the usual jobless claims data. Technically, gold looks quite strong. If it picks up momentum to cross $1,285, it may see further gains to $1,293/1,300.

However, if it moves sideways again, the wait is going to get longer for bulls looking for a break-out above $1,300.