Gold spread provides arbitrage opportunity

Short spells of divergence in gold prices between India, the largest jewellery market, and Dubai, the largest exporter of gold, offers jewellery chains and financial institutions a profitable arbitrage opportunity, Emirates Business has learnt.

This phenomenon is particularly profitable for large jewellery manufacturing businesses operating in special economic zones (SEZs) of the Indian states of Gujarat and Delhi, which are allowed to import gold without the payment of a rudimentary import duty, and are able to sneak out gold into the Indian markets when prices are high. On June 2, gold rose to the "record price" of Rs19,050 (Dh1,524) per 10gm in Indian retail markets when the price globally was slightly lower. At the Dubai Gold & Commodities Exchange (DGCX), gold ranged between $1,216 an ounce and $1,227.10 an ounce on June 2, lower than the record price of $1,249.30 an ounce it hit on May 14.

"The ones using the arbitrage option are banks and large jewellery groups based in India. It's a tricky process that involves the import of gold through the SEZs in Delhi and Gujarat where there are no import duties. Gold is then moved out of the SEZs on the pretext of manufacturing. When prices go higher in the Indian markets, the gold is sold off," a trader based in India said.

There are several factors that trigger arbitrage, industry insiders said, with the primary reason being the duty imposed by the Indian Government last year on the import of gold for sale outside free zones. Furthermore, fluctuations in currencies also give the traders an opportunity to arbitrage gold.

Gold in bulk is sold in terms of ounces and in dollars in Dubai and other international markets, whereas India's huge retail markets see gold being sold in units of 10gm and in Indian rupees, which builds up a slight price difference when currencies fluctuate. "Such a trade may not turn out to be profitable for smaller players, but it is [profitable] for bigger players like large jewellery chains and banks," a trader said.

India increased import duty on gold bars this year from Rs200 per 10gm to Rs300 per 10gm. Last year, the duty on other forms of gold, excluding jewellery, was raised from Rs250 per 10gm to Rs500 per 10gm.

Such price differences also build up between the Indian and US commodity exchanges, which traders in India tend to use to their benefit. Commodity brokerages said attractive price spreads ranging between Rs30 and Rs60 or even more per 10gm of gold between exchanges in the US and India helped them book heavy profits.

Spreads in the past have been both negative and positive between Comex and Indian exchanges – Multi Commodity Exchange of India Ltd and National Commodity and Derivatives Exchange.

Typically, the price for bullion bars from Dubai are slightly lower than those offered from other international centres such as Switzerland or London. Furthermore, the emirate also does not levy export duties on gold and this makes it an attractive place to source gold from.