By K Raveendran
Gold prices have been scaling record levels and the momentum and magnitude of the price rises have been unprecedented. According to World Gold Council sources, while it took nearly a year for domestic prices to rise from Rs 50,000 per 10g to 60,000/10g, the next band of rise from 60,000 to 70,000 took only about five months.
Anecdotal evidence cited by the council suggests that the swiftness of the price uptick has affected gold consumption demand, particularly jewellery demand, which makes up around three-quarters of total consumption. Additionally, most jewellery purchases are tied to wedding-related purchases, Also, consumers are awaiting stabilization in prices for fresh purchases and have been resorting to exchanging or selling old jewellery to benefit from windfall gains. Demand is also likely impacted by election-related restrictions and fewer weddings during the April-May season this year.
Gold prices have rallied since mid-February. Prices rose by 3.1 percent in April following an 8 percent surge in March. WGC analysis shows that risk and momentum have been behind the upward move. Domestic landed gold prices in India mirrored the increase of international gold price, owing to the relative stability in the rupee. To date in April, however, the domestic landed price has risen by 4 percent to Rs 72,403 per 10g versus 3 percent in the LBMA price, due to a depreciation in the value of rupee against the dollar.
The swiftness of the price uptick has affected gold consumption demand, particularly jewellery demand, which makes up around three-quarters of total consumption. Additionally, most jewellery purchases are tied to wedding-related purchases, Also, consumers are awaiting stabilization in prices for fresh purchases and have been resorting to exchanging or selling old jewellery to benefit from windfall gains. Demand is also likely impacted by election-related restrictions and fewer weddings during the April-May season this year.
At the same time, physical investment demand, such as bars and coins has seen an uptick on anticipation of further price increases. Some jewellers and manufacturers have been booking profits by liquidating stock and diverting gains to other investment avenues, but many are facing a liquidity crunch, limiting their ability to add to their inventories.
WGC feels that demand is unlikely to experience a meaningful uplift over the next couple of months, particularly while general elections take place during April to June, as the movement of gold and cash is closely monitored. But some improvement in demand could be expected around the time of Akshaya Tritiya, which falls on 10 May if prices stabilise as this is traditionally considered to be an auspicious time to buy gold.
According to the council, despite the sharp drop in gold imports in March, domestic gold prices continue to trade at a discount to international prices in the face of sluggish demand, particularly for jewellery. The increased supply of recycled gold in response to higher prices is likely a further influencing factor. Discounts are, however, narrowing. April saw India’s gold price discount averaging US$12 per ounce, down from $24in March.
Domestic gold prices often trade at a discount when international gold prices surge. But compared to previous gold price spikes the current domestic price discount is narrower, possibly indicative of pockets of gold demand.
Inflows into Indian gold ETFs weakened in March, with net inflows totalling Rs 3.7 billion, a 62% drop from February, which had recorded a six-month high. The decline could partly be attributed to the quarter- and financial year-end payment requirements of investors. Indian mutual funds as a whole witnessed net outflows in March to the tune of Rs 1,593 billion. According to the council, despite lower net inflows, aided by the surge in gold prices, total assets under management of gold ETFs at the end of March were up 9 percent. (IPA )
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