BENGALURU/MUMBAI (Reuters) - Gold premiums in China surged to their highest in nearly three years this week on fears of limited supply of the metal, while demand in India remained weak amid low prices due to a severe cash crunch following the government's demonetisation move.
The supply shortage, traders said, was due to Beijing's efforts to restrict import licenses.
The import curbs may be part of China's efforts to limit yuan outflows after the currency's slide to its weakest in more than eight years, traders said.
China allows only 13 banks, including three foreign lenders, to import gold, according to the Shanghai Gold Exchange.
"The drag on supply is having an impact on pricing," said Cameron Alexander, an analyst with Thomson Reuters-owned metals consultancy GFMS.
Gold premiums in China against the international benchmark rose to over $40 an ounce this week, the highest since January 2014, according to Thomson Reuters data. Last week, premiums were quoted around $28-$30.
"The Spring festival next year is happening a bit early and we have seen some modest demand for jewellery making," said Jiang Shu, chief analyst at Shandong Gold Group.
Meanwhile, gold discounts narrowed in India as prices dropped to their lowest in 10-1/2 months, but demand remained weak due to cash crunch and fears the government might restrict gold holdings.
Dealers in the world's No.2 consumer of the metal were offering a discount up to $3 an ounce this week over official domestic prices that include a 10 percent import tax. Last week, they had offered a discount of up to $5.
"Many retail consumers are not buying. They think the government might bring new law to limit how much gold people can hold," said Ashok Jain, proprietor of Mumbai-based wholesaler Chenaji Narsinghji.
"They are waiting for this demonetisation process to get over before making big purchases."
The government had clarified earlier this month that "there is no limit on holding of gold jewellery or ornaments."
Last month, Prime Minister Narendra Modi scrapped 500- and 1,000-rupee banknotes, or 86 percent of the value of cash in circulation, as part of a crackdown on corruption, tax evasion and militant financing.
The move hit wedding season demand after the end of key festivals such as Diwali, dealers said.
Local gold prices fell to 26,901 rupees per 10 gram on Thursday, the lowest since Feb. 2, 2016.
"Usually whenever prices drop by 2,000 to 3,000 rupees (per 10 grams), Indian consumers buy aggressively. This is an unusual time. The correction failed to generate demand," said a Mumbai-based dealer with a private bank.
In Hong Kong and Singapore, sellers offered premiums of up to $1.50 an ounce. Discounts in Tokyo remained at 50 cents.
Reporting By Nallur Sethuraman in Bengaluru; Editing by Subhranshu Sahu