India shows link between crude oil and gold

A common theme in recent gold market reports is the link between price movements in the precious metal and crude oil.

While there certainly appears to be a valid correlation in recent years, one that has strengthened in recent months, events in India show a different, unexpected link between the two commodities.

The country's authorities caught the gold market by surprise on November 28 by scrapping the so-called 80-20 rule, under which 20 per cent of all imported gold had to be re-exported in the form of jewellery.

Gold traders had been expecting a tightening of restrictions on gold rather than a loosening, and while a 10 per cent customs duty remains, the likelihood is that the country will now import more of the yellow metal and reclaim from China its title as the world's top importer.

The government under Prime Minister Narendra Modi, which ordered the relaxation, and the Reserve Bank of India (RBI), which announced the move, didn't provide any reasons.

But it's not hard to see a link with crude oil, and to a lesser extent coal.

Crude is country's largest import item by value, followed by gold. Together they accounted for 42 per cent of all imports in October.

However, oil imports by value are falling sharply, with October's $12.36 billion being 19.2 per cent below the same month last year.

This represents a reduction in the current account deficit (CAD) of about $2.6 billion, and that's just one month of oil imports.

OIL SAVINGS OUTWEIGH ANY GOLD GAINS

Assuming Brent oil remains around the current $70 a barrel, India would stand to save about $52.7 billion on oil imports in 2015 versus 2013.

This is based on an average Brent oil price of around $108 a barrel in 2013 and daily imports of around 3.8 million barrels, which is what they have been in the first 10 months of this year.

In contrast, even if gold imports recover to 2013 levels of just under 1,000 tonnes from the current likely 2014 outcome of around 850 tonnes, the extra cost comes nowhere near the saving on oil.

The spot gold price averaged $1,411 an ounce in 2013, meaning India's imports of 974 tonnes cost about $44 billion. If gold averages around $1,200 an ounce in 2015, 1,000 tonnes would cost about $38.4 billion.

This means that, at current prices, India can actually increase gold imports to record levels and still not add to the current account deficit.

Look at these figures and it's not hard to see why gold imports suddenly became less of an economic concern than they were two or three years ago, when they were rising even as the gold price reached a record above $1,900 an ounce in September 2011.

In fact, the current account deficit has largely disappeared as a concern for Modi's government, given the steep declines in the prices of oil, gold and coal.

Even rising coal imports won't add much to the deficit, with prices likely to be at least $10 to $15 a tonne lower next year than they were in 2013.

Even if coal imports jump to 210 million tonnes in the fiscal year starting April 2015, as forecast by consultants OreTeam, that won't cost significantly more than the 168.4 million tonnes imported in the fiscal year ended March 2014.

The decline in crude prices has lowered country's import bill to such an extent that it's conceivable all restrictions on gold imports could be scrapped.

(Clyde Russell is a Reuters columnist. The views expressed are his own.)