Gold’s Global Rout Isn’t Giving Indian Buyers Much Relief

Welcome to India Edition, Bloomberg’s daily dive into what’s moving the worlds of business, markets and politics in this dynamic, fast-paced economy. I’m Menaka Doshi. If you didn’t receive this directly in your inbox, you can subscribe here, and share feedback with us here.

Today, I look at the gold divide leaving Indians waiting and my colleague Rakesh Sharma looks at how strong diesel demand is creating a problem for state-owned fuel retailers.

Waiting On Gold

Gold is down almost 10% this year. Unless you’re Indian.

That’s complicating local investment and consumption decisions, especially ahead of the Diwali festival season.

Here’s what’s happened.

International spot gold prices are down almost 10% this year. But in India, MCX spot gold is still up about 2% since the start of the year, largely because the rupee has weakened against the dollar. The government also more than doubled import duties to 15% in May, raising the landed cost of gold.

That’s offered some protection to Indian investors notwithstanding bouts of volatility through the year, especially in ETF flows. Less so for consumers looking to wear the commodity: prices remain high even after the recent fall.

So what’s the outlook from here?

Today, gold rose as much as 1.1% to near $3,915 an ounce as lower oil prices offered some respite from inflationary pressures and dip buyers were drawn by the metal’s 3.7% slump on Friday to the lowest in a year.

The commodity has found some immediate support from long-term investors who see the current price as cheap. “We are likely to see some dip buying in the Asian session today as investors, and possibly central banks, cautiously add to positions,” Justin Lin, a strategist at Global X ETFs, told Bloomberg. “But gold is undoubtedly sitting at precarious levels.”

Last week, before Friday’s precipitous fall, Amundi, Europe’s largest asset manager, said it expected the commodity to recover to $4,500. “The worst is behind us,” Lorenzo Portelli, head of cross-asset strategy at the Amundi Investment Institute, told Bloomberg then.

One source of support may come from China. The People’s Bank of China expanded holdings by 740,000 ounces (approx. 23 tons) in September, its 23rd consecutive month of purchases.

Chinese households have also been buying the dip. Gold has become an increasingly sought-after investment as consumers hunt for a safe haven at a time when property has slumped, government bond yields have hit record lows and stocks have fallen sharply.

Meanwhile, Indian consumers are still waiting for lower prices.

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A Diesel Problem

Hello, I’m Rakesh, Bloomberg’s Asia Oil Trading Reporter in New Delhi.

Strong demand is usually good news for a business. Sell more, earn more. India’s fuel retailers may not agree.

Diesel demand is surging, a sign of strength across trucking, construction, farming and factories. Consumption jumped 11.7% from a year earlier in October to 8.5 million tons, a record for the month. More unusually, diesel demand is now growing faster than gasoline.

That is turning out to be a headache for state-owned fuel retailers, which haven’t raised diesel prices since May even as international prices have climbed. They are now selling the fuel below cost. Private competitors Reliance Industries and Nayara Energy raised pump prices last month to stem their losses, only to see consumers switch to cheaper state-owned pumps.

Ratings agency ICRA in September said that retailers are losing nine rupees on every liter of diesel sold. Those losses have since climbed as international benchmarks for diesel rose further.

The price gap helps explain why demand in India has stayed firm. Consumers have largely been insulated from the increase in global fuel costs because higher prices haven’t been passed through, Srinivas Tuttagunta, Reliance’s COO for supply and trading, said during an earnings call on Friday.

The distortion has another consequence: fewer Indian diesel cargoes for the rest of the world.Trade intelligence firm Kpler expects India’s diesel exports to fall to about 500,000–550,000 barrels a day in November and December from roughly 700,000 barrels a day in October as refiners divert more fuel to the domestic market. State refiners typically make sure local demand is met first, and export only when there is enough fuel available at home. Domestic consumption is expected to stay elevated through December, supported by agricultural activity, freight movement and industrial demand.

For now, the situation isn’t dire for either private or state-owned oil companies. High global refining margins mean oil companies are still making good money turning crude into diesel and other fuels. Those profits are helping cushion, and in some cases even offsetting, the losses they take when selling fuel at home.

Reliance’s September quarter beat analyst estimates with strong refining margins in the oil business being a key driver. State-owned Indian Oil, HPCL and BPCL all reported profits, helped in part by gains on inventories bought or produced when oil prices were lower.

But those profits may not last if crude prices stay high. That leaves the oil companies in a bind: they are losing money on diesel, but with overall profits still holding up, they have a weaker case for raising pump prices.

Chai Time: Only Bulls

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As always, thanks for reading India Edition. —Menaka

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