Gold Demand in India to Pick Up Around Diwali – WGC

May 18, 2012 at 08:55

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According to the figures that were announced yesterday, China has been the biggest jewellery market for a third consecutive quarter. The council also pointed out that gold demand in China may surge to 30 %in 2012. Moreover, as China’s gold demand is 23% higher than India, WGC signalled that China may soon topple India as the largest gold market.

According to finance ministry sources, the ministry is currently concerned about declining gold demand and is looking at taking necessary steps to control worsening current account deficit. Sources also echoed that that the decline in gold demand was mainly on account of high international prices and as the rupee depreciated to an all-time low.

Speaking about the decline in demand, Ajay Mitra, WGC Managing Director, India & Middle East, says that the disruption in the gold industry has been because of some of the measures announced by the finance ministry, which centered on excise duty and tax. “Also the trade was shut for 21 days, due to which customers have not really come back, maybe because it is an environment of confusion. The consumer sentiment has been poor over last three quarters due to different economic factors remaining in our country,” he further added.

Mitra further points out that the demand for gold is soft not due of the increase in customs, but because of the increase in gold prices over the last couple of years. He states that gold prices have risen on an average of 25-50% YoY. “Demand is not driven by increase in import taxes, but the mechanisms that has impacted and that really is the reason for softening in the margins,” Mitra said.

Acknowledging that the rupee slide might have impacted the gold demand, Mitra said that but the man on the street is not clued on to the dollar rupee equation. “A layman just sees that inflation is high, but when he gets to a store to purchase gold he is informed by the retailer that prices will be corrected because the rupee has weakened against a dollar. Following which he hesitates and dwindles on his decision to buy gold,” he explained.

He further pointed out that some respite for gold will be only around the third quarter when the consumers are in a festive mood around Diwali. “The festive season will also mark correction in economy as many analysts suggest and gold will mirror that sentiment,” he adds.

However, he says that what will impact gold’s demand over next few quarters is the macro economic condition. “If inflation continues, we are anticipating withdrawal of subsidy on other consumption products. This will result in tightening of belt,” he says

Although the demand for gold seems to be on a decline, Mitra still believes that the fundamentals around gold continue to be strong. He says so because gold is an asset of safety, it has a good hedge against inflation and in rupee terms it has given 14-15% returns over last five years.