Increase in import duty on gold is likely to be dampener for the yellow metal. According to World Gold Council’s estimates a 2.5% increase to gold’s import duty may result in a reduction of gold demand by approximately 2.4% in 2019.
World Gold Council (WGC) said in a report released on Thursday that if the higher levy were to become permanent, it could reduce long-term Indian consumer demand by slightly less than 1% per year. In the Union budget 2019, the finance minister Nirmala Sitharaman proposed to increase custom duty on gold and other precious metals from 10% to 12.5%.
After the budget announcement, commodity analysts had said that the hike in import duties was unexpected. They expected physical demand for gold falling due to high prices but prices of gold will continue to remain firm.
According to WGC weaker economic growth and the possible impact of higher gold price volatility may result in softer consumer demand this year, especially in emerging markets that make up the lion share of annual demand. However, it added that broad structural economic reforms being implemented in both India and China will likely support long-term gold demand.
“In addition, we expect central bank gold demand – led by emerging markets – to remain positive for the foreseeable future," it said.
Financial markets uncertainty and accommodative monetary policy are likely to support gold investment demand over the next six to twelve months, according to WGC. “The prospect of lower interest rates should support gold investment demand. Our research indicates that the gold price was higher in the 12 months following the end of a tightening cycle. Moreover, historical gold returns are more than twice their long-term average during periods of negative real rates. At the same time, the US dollar – usually a headwind for gold – may remain rangebound as trade tensions and lower rates offset continued economic growth," it said.
In this year so far, gold prices have increased 11.02% after showing lower returns in 2018. In June the yellow metal surged 8%.
According to World Gold Council (WGC), gold’s price increase in June was particularly sharp – driven by falling rates, higher risk and momentum – investors have generally been more bullish this year. “This is evidenced by the positive inflows in gold-backed exchange traded funds (ETFs), capturing $5.0 billion or 108 tonnes in 2019 so far led by European funds, as well as higher net longs in COMEX futures which averaged 369t during the first half," WGC said.
As bonds are expensive with yields have generally fallen and credit spreads compressed since 2011, WGC said that alternative high quality, liquid assets such as gold may help investors balance risks more effectively, while providing uncorrelated long-term returns.