Gold steadied on Friday but was still set for its largest weekly decline in three months, after top consumer India said it would double import duties on bullion and upbeat US data this week fed optimism over the global economy, boosting risk appetite. Customs duty on Indian imports of gold and platinum will rise effective March 17 after Finance Minister Pranab Mukherjee announced the move on Friday as part of measures to cut the deficit in his 2012/13 budget.
The bullion market relies heavily on Indian jewellery demand. Last year, the country imported a record 969 tonnes of metal. Mukherjee said on Friday the strong growth in imports had played a key role in widening India's current account deficit.
Gold has been hampered this week by the rise in the dollar and soaring treasury yields, following data showing the US economy may be on a stronger footing than initially expected, according to figures on consumer spending and regional measures of factory activity, emboldening investors to attach a dwindling chance of the Federal Reserve providing more monetary stimulus. Inflation data for February showed US consumer prices did not rise as much as expected, meaning that the Fed would continue to have the leeway to keep monetary policy accommodative to encourage growth.
Investors hold a near-record amount of gold now in exchange-traded products and have stepped up their holdings of gold through US futures so far in 2012, meaning the market could be subject to steeper sell-offs by disenchanted players, at least in the near term. Spot gold was quoted down 0.1 percent at $1,656.91 an ounce by 1500 GMT, having lost more than 3 percent so far this week. US April gold futures were down 0.1 percent at $1,657.50 an ounce, having traded earlier at a session low of $1,639.70.
"We will have to wait and see how (the rise in the Indian duty) works but from the outlines we are seeing, it will be slightly bearish for gold in the immediate future," MKS Finance head of trading Afshin Nabavi said. "The market still feels a bit top-heavy to me. We're still not seeing a lot of demand despite lower prices, so I think we should have a bit of a further correction on the downside, to $1,600.00 or even just below," he said, adding a decline to those price levels would likely trigger a substantial response from both consumers and investors. Gold imports to India, the world's top importer, are likely to fall significantly in 2012 as the government's decision to double import duty to 4 percent is seen squeezing local demand, especially for jewellery, industry officials said.
Bombay Bullion Association President Prithviraj Kothari said the increase would prompt a rise in smuggled gold and impact the jewellery sector more than the investment sector. "In purely psychological terms, the news is likely to weigh on the price of gold and in the current market could help ensure that the gold price does not increase significantly in the near future," Commerzbank analysts said in a note.
Posing an additional headwind to gold, which thrives in low-rate environments, 10-year US Treasury yields have risen by more than a quarter of a percentage point this week, topping 2.3 percent, in their biggest one-week rise since early July 2011. In other precious metals, silver was down 0.1 percent on the day at $32.48 an ounce, bringing the gold/silver ratio - the number of ounces of silver needed to buy one ounce of gold - to around 51.0, the highest for two-weeks, reflecting silver's underperformance relative to gold. Platinum fell 0.4 percent to $1,672.99 an ounce, having lost 0.5 percent so far this week, which would make this its third consecutive week of losses. Palladium was down 0.3 percent on the day at $698.97.