Dubai could see a “gold rush” between early December 26 and late December 31 as shoppers use their last opportunity to pick up jewellery before VAT comes into effect. They will do so hoping these could also put them in with a chance to win in the DSF 2018 gold raffles. (The Dubai gold rate as on December 25 was Dh145 a gram for 22 carat.) “Everything hinges on these five days – because the moment VAT comes into the frame, consumers will have a different mindset,” said Abdul Salam K.P., Executive Director at Malabar Gold & Diamonds. “I think every jeweller in Dubai is maintaining optimum levels to meet the expected rush.”
All gold jewellery purchases have been assigned the 5 per cent VAT, while there is 0 per cent rate on 24 carat gold in the form of bars. As per the VAT guidelines, anything with 99 per cent gold purity and in a tradable form in the international markets is rated at 0 per cent. (But it’s still not clear whether coins have been assigned this classification.) During DSF, gold buyers enter into a daily raffle for 500 grams and two additional wins of 250 grams each. In all, there are 33 Even before the launch of DSF 2018 on December 26, there were signs of increased shopper activity for gold and jewellery. “Reviewing the trends of the last week, there are chances for a great beginning to DSF from December 26 to 31,” said Cyriac Verghese, General Manager of Sky Jewellery. “Because from January, VAT charges can make a huge difference for low to mid-range spenders.”
How big will the likely dip be from January? Trade sources suggest retail volume declines by as much as 50 per cent over levels seen in the market between September to end December (and discounting the likely rush in the last five days of the year). But the consensus view is that a 30 per cent decline in gold jewellery demand is likely for the first three to six months of 2018 and that it should improve after that.
Consumer sentiments will also be helped if international gold prices remain in a tight range. (On December 25, it was at $1,278.1 an ounce and up by $8.5.) But there will be longer term consequences for the jewellery trade in Dubai. “The “key money” demand for outlets in entire Gold Souq is already down,” said Anil Dhanak, Managing Director of Kanz Jewellery. “Half of the outlets in the Gold Souq are available for sale – it’s something that has never happened before. The impression is that smaller retailers will be forced out.
“From January, I will be reducing my inventory at the stores until such time gold consumers adjust to the VAT realities.”
One silver lining in gold’s VAT future is that tourist buyers will not feel much of a burden from the 5 per cent charge. Also, these tourists could possibly reclaim the VAT component at the time of their exit from the country.
That the VAT is set at 5 per cent also means buying in Dubai retains a cost advantage for shoppers from overseas. For instance, even with VAT, there is an average 8 per cent price differential between a gram of gold bought in the UAE and in India.
But Dhanak sees some issues here as well. “For instance, many Indian buyers are used to leaving no paper trails when they buy gold from here. The moment they apply for the VAT repayments at the airport, they will always carry the risk of leaving such a paper trail. These are all changes from the status quo and will need time to adjust to.”
If so, everything after January 1 will depend on how quickly gold shoppers are able to integrate the 5 per cent charge into their mindsets.
“Any volatility that pushes gold prices higher will delay the period of adjustment,” said Salam. “But short-term forecasts for international gold prices are for stability – the US economy and stocks are performing well and the new tax reforms there should keep things that way. The last thing the gold market in the UAE needs will be for prices to shoot up suddenly.”
From January, jewellers in the UAE will show both the VAT on the gold component in jewellery (typically about 70-80 per cent) and separately the VAT on making charges for that piece.
Also, UAE’s jewellery retailers are expected to maintain bare minimum stocks until such time they see demand returning back to normal levels. In any market after VAT is added, or rates increased, there is a certain period when consumer buying takes a sharp dip. Gold and jewellery being a discretionary spend is more vulnerable to such a drop-off.—Agencies