Over the last year, we have seen some change in the gold demand pattern in India mostly thanks to high prices. For calendar year 2012, the demand for gold fell 12% to 864 tonnes. This is a sharp drop considering how much Indians love to stock up the yellow metal. In fact, the first quarter gold demand fell 29% and the second quarter demand fell 38% in India. In the last quarter, there was a 41% year-on-year increase in demand volume and hence the full year drop is lower.
According to World Gold Council (WGC)’s gold demand trend report for 2012 released last week, this year-end pick-up in demand may have been a result of buying before the duty hike to 6% from January 2013. On being asked whether he thought this buying is sustainable, Marcus Grubb, managing director-investment, WGC, said, “We expect global demand to be firm as global economic uncertainty continues with the euro zone risks not over, US debt problems persisting and now even the UK may be heading back into recession.”
But the fact is that Indian investors have reduced the pace of investing in gold. Data from the Association of Mutual Funds in India, the mutual funds industry body, shows that net flows for exchange-traded funds (ETFs) have fallen from Rs.4,046 crore in 2011 to Rs.1,826 crore in 2012, down 55%. As per the WGC report, in India, total investment demand was down 15% to 312 tonnes in 2012. Also, jewellery demand was down 11% in volume terms.
Will duty hike keep gold
demand in check?
Import duty on gold has increased in phases to 6% over the last one year. The opinion on how the increase in import duty affects demand is somewhat divided. To quite an extent, demand for gold is not price sensitive. This is more so in the case of jewellery.
Typically, people allocate a certain amount for buying jewellery and if prices increase, they just settle for fewer grams. Says Rajeev Sheth, chairman and managing director, Tara Jewels Ltd, “Duty hikes will impact pure bullion demand but not so much consumption demand. The amount of money one wants to spend on gold jewellery remains the same, what goes down is the volume of sale.”
This is one of the reasons why sales volume in tonnes is lower. At some point, resistance to high prices for incremental buying does kick in. Sheth says, “A duty of 6% is a large figure and can’t be ignored. Previous taxation attempts found resistance and were withdrawn, so the general public will wait to see whether this is here to stay.”
Now if we look at gold investments, after a dismal 2012 with only 7.68% return, investors may be losing interest. Says Chirag Mehta, fund manager (commodity), Quantum Asset Management Co. Pvt. Ltd, “The import duty is not a deterrence, but overall savings are down and that is having an impact. Demand for gold ETFs is not so much for fresh buying, but it is a shift from physical gold to paper, so 2011 was a record year.” Also, what’s keeping inflows to gold ETFs going is the systematic investment plans.
Will high prices affect
Many are confident that the uncertain global economy and buying from central banks will keep demand and, hence, prices of gold trending higher. Grubb says, “Demand for ETFs has grown 51% (globally). This is not surprising as people are looking at a situation where quantitative easing in some form is expected to continue globally. So demand from high net worth individuals and institutions is likely to continue.” He added that at present gold is an ideal hedge against depreciating currency. In 2012, there was a lot of demand from central banks across the world, they bought 534.6 tonnes of gold, an increase of 17%.
While domestic gold prices will broadly follow the global price (which increased 7% in 2012 but has seen a decline of 1.08% since 18 February), currency dynamics will impact the final price. The demand situation in India is also slightly different as the government is trying to bring down gold imports to reduce the high current account deficit.
But knowing the Indian penchant for the precious metal, along with making the metal expensive to buy, one will have to further incentivize other assets for money to shift away from gold. As Sheth put it, “the Indian gold buyer is a mature investor with an inventory of gold which is also appreciating as price moves up. Hence, the willingness to continue buying at higher prices is more (compared with other commodities).”