"India’s love affair with gold tarnishing"

As the goldbugs load up on gold futures, one of the main buyers of physical gold in pulling back. From the Financial Times:

As India’s voracious appetite for gold wanes, producers of the precious metal are taking heed.

Indian consumers buy about 25 per cent of the world’s gold, the vast majority of which is imported, making the country the largest market for the metal.

Globally, investors have poured into gold, seeking refuge from the deflating dollar…

But with the recent volatility in gold prices, which have hit more than $1,000 per troy ounce, investors have become nervous and sales of gold in India have fallen sharply. Demand for gold in India plummeted 64 per cent year-on-year in the fourth quarter after growing 40 per cent in the first three quarters of last year.

According to James Burton, chief executive of the World Gold Council, the global miners’ group, in the first half of 2007 India was on track to buy more than 1,000 tonnes of gold for the year, but demand “tailed off at the end of the year”, as gold prices rose. Jewellers in India have been particularly hard hit and tell of subdued sales as consumers baulk at high prices. Even families of marrying couples, traditionally obliged to drape newlyweds in the precious metal, are passing on family heirlooms instead of buying new gold.

The slowdown has added urgency to talks in New Delhi this month between Indian officials and the heads of the world’s largest gold producers, including Barrick Gold, AngloGold Ashanti, and Goldfields and Newmont, about exploration of India’s untapped domestic resources.

The country has been unable to attract enough investment to survey, explore and mine for gold because of unattractive policies, such as the requirement of separate licences for each step of the process and uncertainty about procedures for transferring mining rights.

Miners of precious metals and stones are permitted foreign direct investment of 100 per cent under Indian law. But layers of red tape and ambiguous policies have deterred foreign interest.

That could be about to change.

Subbarami Reddy, India’s mining minister, is spearheading policy efforts to attract more foreign gold miners. This month, Mr Reddy presented a new mining policy to parliament intended to reduce bureaucracy and safeguard investor interests. It would “encourage investing heavy capital in exploration for gold and diamonds,” he said.

The new guidelines aim to shorten the time it takes for mining leases to be granted to between six and 12 months; the current process can take years. Investment would be made easier, paperwork reduced and prospecting companies would automatically get a mining licence. “Prospecting and mining shall be recognised as independent activities with transferability of concessions playing a key role in mineral sector development,” a document presenting the new policy to parliament said.

India’s handful of gold mines produce about 2.5 tonnes of the metal each year, a fraction of the country’s annual consumption of about 800 tonnes. It is unclear how much gold India could yield, although Mr Reddy has alluded to possible domestic reserves of 25,000 tonnes.

Gregory Wilkins, chief executive of Canada’s Barrick, the world’s largest gold producer, agrees that the new policies outlined are a step in the right direction. “The government is doing a good job of creating a favourable investment climate,” he said.

However, the guidelines failed to address the issue of royalties. State governments are demanding a move to value-based royalties on minerals from a flat rate, potentially eroding miners’ margins. Officials from New Delhi and the states have yet to agree on how royalties would be charged. Parliamentary approval could come quickly, says Ajay Mitra, India managing director for the World Gold Council. But how the mining policy would be implemented remains unclear.