Indian measures to discourage gold imports is shutting the door on top exporter Dubai, where trade activity has fallen by as much as 60 percent over the past two months, dealers said.
With gold the most expensive non-essential item on India's import bill, the country's government, in moves to curb a bulging current account deficit, hiked the duty on gold bullion imports three times this year to a record 10 percent, while increasing the import duty on gold jewellery to 15 percent.
Pakistan also suspended a duty-free gold import arrangement in August after purchases soared in the first half and topped $514 million in July alone, citing smuggling into India. The ban was lifted in September, but trade has remained subdued.
"Overall, Dubai gold trade is down by 60 percent as a result of the Indian move and a swathe of paperwork and laws introduced by Pakistan recently, which make it very difficult to ship gold there," said Abid Riaz, chief accountant at wholesalers ACM Gold in Dubai's Gold Souk.
More than 25 percent of the world's physical gold passed through the emirate in 2012, with the value of gold traded reaching $70 billion.
India, the world's biggest gold market, is Dubai's top trading partner for gold, accounting for around 50 percent of its total gold exports. In the first half of the year, Dubai's exports of gold and jewellery to India stood at $21 billion, some 10 percent above last year's figure.
On Sept. 20, the Indian government and banks agreed how new rules on imports should work, but shipments into the country are unlikely to match the levels seen in the first half of the year, traders said.
"Even once imports have re-started, we will not see the same kind of volumes that we used to see earlier," a Dubai-based source at an international trading house said.
"For now, there is a new imports model, which is quite complicated, and nobody still has a clear understanding on how to execute that," he added.
A sharp rise in Indian gold prices, which reached an all-time high above 35,000 rupees per 10 grams in August, also attracted a lot of scrap jewellery selling from the domestic market, which would have curbed imports from traditional suppliers Dubai and Switzerland.
"Even if there was no imports control, there wouldn't have been much in terms of exports into India as you had a lot of old jewellery being resold within the country," Emirates NBD head of commodities Gerry Schubert said.
But a higher gold rupee price compared to the cost of jewellery in the United Arab Emirates (UAE) is seen by some to be to Dubai's advantage, as it could increase demand from Indian expats living in the Gulf, who would usually buy gold in India.
"With a 15 percent import duty on jewellery, gold in Dubai becomes much cheaper, and traders think that should be positive for Dubai's jewellery demand, but Dubai is not a huge consumption market," Gautam Sashittal, COO at the Dubai Multi Commodity Centre, said.
India's measures are however unlikely to dampen local consumers' appetite for the metal in the upcoming wedding and festival season and are conversely seen creating a big incentive for smuggling, which could help Dubai's trade.
"Ultimately (in the next 6-12 months) a lot of Dubai-based Indian companies will manage the gold imports here and then bring the gold from here directly into India through whichever means necessary," Emirates NBD's Schubert said.
The World Gold Council says smuggled gold via neighbouring countries would hit 200 tonnes this year, up 50 percent on 2012.