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Gold Demand Turns Weak in Major Markets and Set to Remain so

 

G. Chandrashekhar, Commodities Market Specialist, & Consulting Editor, Bullion Bulletin

 

 

Despite forecasts of robust pick up in gold demand by many experts, for several months this author has maintained that physical demand for gold will continue to remain weak in 2017, especially in a large market such as India. Now, import data suggest that demand is indeed subdued in two of the world’s largest markets, India and China.  

 

As for gold import into India, August data showed that there has been an increase of nearly 70 percent year on year in dollar terms. However, converting the value to quantity at the August average price shows arrival of about 45-46 tonnes. So, imports have aggregated well over 200 tonnes in the first eight months of the current calendar year.

 

There already are concerns within government circles about the increase in value of import in the last 4-5 months. While no drastic policy intervention or tariff action is expected, the demand outlook is clouded by some negative factors. Less-than-satisfactory Kharif crop harvests are likely to cap rural incomes. Several regions including Punjab, Haryana, Uttar Pradesh and Madhya Pradesh have experienced below normal rainfall which can potentially hurt rural incomes.

 

Clearly, the Indian gold market has been impacted negatively first by demonetization and its aftereffects followed by introduction Goods and Services Tax with effect from July 1. The latest weakening of the rupee (after a bout of firming) is also likely to push prices higher and compress demand.

 

It must of course be conceded that the period June to September is traditionally marked by low consumption demand because of nationwide agricultural operations. The last quarter of the year may of course witness some pickup in demand because of seasonal factors.  

 

Another key factor to impact global price is the US Fed’s clear intention to announce one more rate hike in December as well as commence the process of balance sheet normalization in October. This is sure to reverse the weak trend the greenback has faced in the last several weeks, and in turn prove to be negative for the yellow metal.

 

Recent geopolitical developments, notably friction between the US and North Korea, have come to the aid of gold. The metal’s safe haven status is of course well known. How the situation is going to pan out is anybody’s guess. If tensions deescalate as is widely expected and with Fed’s largely clear stand on rate hike and enervated demand growth, there is every reason to believe, gold prices will come under intense pressure.

 

Prices could move closer to $ 1250 an ounce in the weeks ahead, and even lower depending on developments. However, weakening rupee may partially neutralize the overseas price decline and deny Indian importers the full benefit of lower international prices.   

 

For India, gold is important from social and economic perspective. It is therefore critical that there is more transparency in physical trade in the yellow metal. The country needs a system of recording import contracts, monitoring physical arrivals as well as disposal and payment system. The Ministry of Finance, the Ministry of Commerce and the Reserve Bank of India have to evolve a robust system that will not only provide real-time information about trade but also create an audit trail.

 

Disclaimer: Views are personal and not the views of the publisher.