Slack Gold Demand in India to Weigh on Prices?

May 13, 2012 at 20:39

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Global gold prices have declined more than 10% since the end of February, but that hasn’t whetted the appetite of the world’s largest gold consumer.

India accounts for 27% of the world’s demand for gold jewelry and investment, according to the World Gold Council. Gold is widely purchased before weddings and festivals in India.

But protests, boycotts, new taxes and, most important, a decline in India’s currency, the rupee, have kept domestic gold prices high and consumers on the sidelines. Such weakness in Indian demand weighs on world gold prices.

A drop in the rupee is the latest factor that “may keep interest in Indian gold jewelry at bay” and ripple into the international market, HSBC analyst James Steel said. Last month, he cut his 2012 average gold-price forecast by 5%, to $1,760 a troy ounce, citing slack demand from India, among other factors.

Last week, Finance Minister Pranab Mukherjee agreed to roll back a newly introduced domestic tax on the sale of gold jewelry. The proposed tax had led to protests that included gold merchants shuttering their stores in opposition to the tax for 21 days. When the government increased taxes and jewelers went on strike, the effects percolated into global prices, said Harish Galipelli, head of research at JRG Wealth Management, a commodity brokerage firm. The strike ended April 6.

Though that tax-related upheaval is out of the way, consumers still must contend with the fall in the rupee, which is helping keep local prices high even as global gold prices drop.

The front-month gold futures contract has dropped 12% to $1,583.60 Friday from $1,790.50 on Feb. 28 on the Comex division of the New York Mercantile Exchange. Gold for immediate delivery has fallen 11% to $1,591.60 a troy ounce on Friday from $1,786.75 on Feb. 28.

In the past, Indian buyers have seized on lower prices to buy more gold, but this time they have been undermined by the weak rupee. India’s currency was trading at around 53.57 per dollar Friday, down about 9% from around 49 rupees at the end of February. This means gold importers get fewer dollars for their rupees when they exchange money to buy dollar-denominated gold.

“The weakness of the rupee is countering the fall in the dollar price of gold and is likely to act as a drag on demand in the world’s biggest market,” said Jeffrey Rhodes, the Dubai-based global head of precious metals at INTL Commodities DMCC. “For me, the key to gold demand in India is the price in rupee terms.”

On top of the weak rupee, gold importers are dealing with higher taxes. While the government removed the tax on gold jewelry, it kept a gold-import tax of 4%. Until December, the import tax was 1%.

The currency and tax factors have supported domestic gold prices. Gold in India was quoted at around 28,315 rupees for 10 grams Friday, down only 5% from its peak of 29,800 for 10 grams in December.

Such high prices will keep demand at bay, even though the usually busy wedding season kicks off next month. “There will be some increase in purchases, but volumes will be small,” said Girish Choksi, an India-based bullion dealer. “The situation would have been totally different if Indian prices had fallen in tandem with global rates.”

Weaker demand in India leaves more supply on the global market.

According to Prithviraj Kothari, president of the Bombay Bullion Association, India’s import demand this year will be no more than 750 to 800 metric tons because of high prices, down from 969 tons last year.

“We will be happy if it crosses 800 tons this year,” said Pradeep Unni, head of research at Richcomm Global Services, a commodity brokerage in Dubai.