Gold and demonetisation
In times of trouble for gold—and the yellow metal has slid 11% over the past six week—India has traditionally provided a safety net. Indians typically account for between a fifth and a quarter of total global gold demand in the second half of the year, with bargain-hunting buyers putting a floor under prices when they fall too far.
That’s particularly so in the period starting November, when most weddings take place. This year was expected to be different by some because of demonetisation, and this seemed borne out in the precipitous drop in prices over the past two months. But, interestingly, demonetisation seems to have had the opposite effect to what some suggested.
Gold consumption didn’t weaken, or even hold steady in November. It boomed. That challenges the view that India has been a drag on gold over the past month. That supports anecdotes immediately after Narendra Modi’s announcement, suggesting the rush to convert expiring banknotes into alternative assets was helping rather than hindering gold demand.
India’s love affair with gold may yet provide support to prices, particularly as the recent falls have driven the metal below the Rs30,000-per-10g level where local buyers come back to the market. But anyone hoping this will rescue the yellow metal from its current predicament may find themselves disappointed. Right now, investment funds spooked by the prospect of higher interest rates are selling faster than Indian consumers are buying. Until that dynamic levels out, gold’s road will be rocky.