New Delhi, September 15: When 26-year-old Abdul Salam from Dubai was arrested at Mumbai airport last month with 156 gold chains concealed in his shoes, he was trying to land an irresistible windfall. Gold prices are rising faster in India than overseas. And this has brought back a profit opportunity, legal, not-quite-legal and illegal.
Gold arbitrage is promising punters as much as 12% annual return on investment. For some, it's almost Haji Mastan time again. But here's a difference - the infamous gold smuggler arbitraged on government ban on gold imports, today's shadier punters rely on the rupee's weakness against the dollar and the impact a weak rupee has on local gold prices.
There has been a 10-fold increase in the number of gold smuggling cases in recent months. Between April and June this year, authorities impounded gold worth 940 crore in some 200 cases of smuggling, up 272% over the same period last year, finance ministry data shows.
Smugglers make money if they can successfully avoid paying duties - 4% customs duty and other taxes, which add 5%-plus to the landed cost of gold.
Arbitraging on gold in less risky ways is possible - but complicated. The incentives, for all kinds of punters, is however simple to understand.
Take this price comparison. On September 10, 2011, the spot London price was $1,857/ounce. The price on MCX in Mumbai was 28,152/10 gms. On September 10, 2012, the spot London price was $1,736. The price on MCX was 32,035. In other words, while gold overseas dropped 6.5% in last one year, gold on MCX has risen almost 14%.
Why? Last September, the dollar was trading at 46.48. Now, the exchange rate is 55.36. It's this near- 20% depreciation of the rupee that has pushed up local gold prices.
The thumb rule is that every one rupee rise or fall in the exchange rate leads to a movement of 500-550 per 10 gm in the same direction on MCX. Since the rupee is expected to further weaken against the dollar as companies scramble to pay back overseas loans in the next couple of months, gold's faster rise in India is virtually guaranteed for the rest of the year.
"Normally international gold prices rise on the back of a weakening dollar. Currently, while the dollar's weakness continues to push up gold, the dollar has strengthened against the rupee. That is why Indian prices are higher than the world market. It is a pure currency play," says analyst Thiagarajan Gnanasekar at CommTrendz Research and Fund Management.
How does a canny investor - assuming he's not keen on smuggling - take advantage of this currency play?
When gold lands legally in India, it attracts taxes that add up to more than 5% (4% customs duty and local taxes). After paying that duty, there's no real possibility of arbitrage. That's why NRIs, allowed to legally import 1 kg gold per head, can't play the local market.
Theoretically, an Indian investor can buy a gold contract on New York Mercantile Exchange's Comex division, hedge the rupee against the dollar, and sell an equivalent contract on the MCX, says Ashok Mittal, CEO, Emkay Commotrade, a brokerage.
This can be a high risk strategy. You have to pay some cash upfront as margin money in both MCX and Comex along with the brokerage fees. There is the cost of hedging the rupee against the dollar.
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