Home / Money / Personal Finance /  ‘Inflation, if not neutralized, will drive demand for gold’
Listen to this article

A report by the World Gold Council (WGC) showed that India’s gold demand declined 18% in the first quarter of the current calendar year. In an interview with Mint, Somasundaram PR, regional CEO, India, WGC, shared his view on the impact of sticky inflation on gold demand . Edited excerpts.

The report shows that the demand for jewellery went down, but investment demand rose. What’s the reason behind this divide?

Generally, when prices rise in the short run, people who have money and want to buy gold look at bars and coins in place of jewellery because the latter comes with its own value-added cost in the form of making charges of 10-20% or higher. This cost is very small for bars or coins. So when you have a pool of money and you are not looking at gold for a particular occasion, you will obviously bend towards bars and coins.

Will rising inflation drive short-term demand for gold? 

Absolutely. Inflation is one of the favourable factors for gold. I don’t think bank interest rates are keeping up with it. So this is a very typical repeat of what we saw in 2013-14 that if the inflation goes up and it is not neutralized by higher savings rates, it will lead to an increase in gold demand. But, if it is coupled with very volatile gold prices, you may not see this equation play out as clearly as it played out in 2013-14.

What’s your long-term view?

In the long term as we see in India, demand responds to an increase in income. A 1% increase in income leads to a 1% increase in demand, while a 1% increase in price leads to half a percent decrease in demand. What this econometric analysis says is that the impact of income on gold demand is much stronger than the impact of any other factor in the long term. Therefore, as a lot of people come into the middle class, you will find that the demand for gold will grow. 

What’s your expectation from Akshaya Tritiya this year?

It will be better than the last two years when there were lockdowns. But it is not going to be one of the best ones  because price points are pretty stiff right now. Consumers have not accepted the current 55,000 post GST price. It’s not that they don’t like it when the prices go up but they’re not very sure that one month down the line, this price will remain so. If the price of gold also abates, they don’t want to be seen as having bought gold at a higher price. 

(Abhinav Kaul contributed to this story.)

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout