Smuggled gold may take refiners out of business

Indian gold refiners just months ago were ramping up capacity and struggling to secure enough ore from miners. Now, they are suspending operations as a surge in smuggled bullion wipes out thin margins.

Gold importing banks and big jewellers have also been hit by the growing entry of illicit gold, which avoids import duties and makes its way on to the so-called “grey market” where it is sold to end-users at a discount.

Smuggled gold could account for more than a third of demand this year in India potentially costing the government over $1 billion in lost revenue.

The upsurge will lead to pressure for a reduction in the 10 per cent import duty and a rethink on recently introduced levies on gold jewellery, which critics say are boosting the unofficial trade the government has been trying to curb.

“Gold refiners have less than a 1 percent margin. If smugglers offer 4 or 5 percent discounts, then we have no choice but to close our operations,” James Jose, secretary of the Association of Gold Refineries and Mints told Reuters. All 32 refineries in the country have stopped buying dore — a semi-pure alloy made by miners — in the past few months and are relying on treating scrap gold until market conditions normalise, he said.

“Last fiscal year we refined 120 tonnes of gold. With local scrap supplies we can produce 20 tonnes of refined gold in the current year,” said Rajesh Khosla, managing director of MMTC-PAMP India, the country's biggest refinery.

India raised the duty on gold imports to 10 percent three years ago, aiming to dampen buying and narrow the current account deficit in a country where gold is seen as a store of wealth for rich and poor alike. Smugglers evade the duty and offer cheap gold to buyers such as bullion dealers and small jewellers, who can pay up to $100 an ounce below official domestic prices, currently around $1,340 an ounce.

Falling gold prices deterred the illicit trade last year but smuggling has surged in recent months amid rising prices and the reintroduction in March of a 1 percent local sales tax on gold jewellery.

The figures for smuggled gold into India could double to as much as 300 tonnes in 2016, All India Gems and Jewellery Trade Federation director Bachhraj Bamalwa said, although the World Gold Council has put the figure at 160 tonnes.