(Repeats item issued earlier. The opinions expressed here arethose of the author, a columnist for Reuters.)
* GRAPHIC: Gold price vs. SPDR holdings: By Clyde RussellLAUNCESTON, Australia, July 9 (Reuters) - Gold's recentrally to a six-year high is suddenly looking a little morefragile after India, the world's number two buyer, unexpectedlyhiked import duties.The increase in the duty to 12.5% from 10% on July 5 caughtgold traders and jewellery manufacturers off guard as some hadbeen expecting the government to lower the tax instead. The Indian government wants to reduce its fiscal deficit aswell as the trade deficit, and since gold is the second biggestimport by value behind crude oil and fuels, it is an obvioustarget for increased taxation.While boosting the cost of gold to domestic consumers willlead to an increase in smuggling of the precious metal, it'salso likely that demand growth will take a hit.The last time an Indian government raised import taxes, inAugust 2013, demand for gold jewellery fell sharply and tookabout a year to recover to previous levels.India's gold jewellery demand fell 17% in the fourth quarterof 2013 to 138.1 tonnes, down from 166.6 tonnes in the samequarter a year earlier.
The next three quarters all recorded year-on-year declinesin demand, and it took until the fourth quarter of 2014 fordemand to recover, when it rose to 169.2 tonnes.Even if smuggled gold does replace some of the likely lostdemand, the point is that Indian consumers face higher costs fortheir gold, and this is likely to crimp demand.Gold recently reached a record high in local currency terms,hitting 99,666 rupees ($1,454) an ounce on June 25, although ithas since slipped to end at 95,640 rupees on Monday.Since much of India's gold purchases are for culturaloccasions such as weddings, higher prices tend to act as a dragon demand.This is in contrast to China, the world's top gold consumer,where price rallies often spur buying as investors seek tobenefit from the gains.The question for gold markets is whether any loss of demandin India will be enough to curtail the current uptrend, whichhas seen gold gain about 20% since the low of $1,159.96an ounce on Aug. 16 last year to Monday's close of $1,395.20.It's unlikely that a slowing of India's demand would reversethe current uptrend, rather it would take a combination offactors, but the problem for gold is that some of these may befalling into place.FED WORRIESPart of gold's recent rally has been built aroundexpectations that the U.S. Federal Reserve will soon cutinterest rates, with easier monetary policy traditionally beingpositive for gold.But strong gains in U.S. employment have cast doubt onwhether the Fed will lower rates any time soon, notwithstandingpressure on it to do so by President Donald Trump.It may even be the case that Trump's repeated calls forlower rates acts as a disincentive for the Fed to do so, giventhe board may not want to appear as if they are bowing topolitical pressure.There are still positive drivers for gold, including aweakening outlook for global economic growth and the unresolvedtrade tensions between the United States and China, as well aswith several other major U.S. trading partners.Exchange-traded funds have also seen rising purchases inrecent weeks, with the largest, the SPDR Gold Trust, showingholdings of 25.62 million ounces on July 5, upfrom this year's low of 25.57 million on May 15.Overall, what has changed with the India tax hike and theuncertainty over when the Fed will lower interest rates is thatthe overwhelmingly positive backdrop for gold has dimmedsomewhat.That doesn't mean further gains are unlikely, but it maymean they will be harder fought.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Gold price vs SPDR holdings ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Richard Pullin)
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