Gold demand in India, the world?s biggest consumer, will likely prosper despite the recent government decision to discourage the trade, as bleak prospects of a global economic recovery leave fewer choices for investors to park funds. Some analysts, however, warn gold may suffer if the European economy, hit by sovereign debt crisis, shows signs of a revival.
The Budget has proposed doubling of an import duty, effectively to 4.16% including the surcharge, and slapped an effective excise duty of 3% on gold jewellery. It has also sought to made it mandatory for jewellers to deduct 1% tax at source for sales of jewellery worth R2,00,000 or more. Customers buying jewellery worth R200,000 or more will also require to mention their PANs.
Industry and trade executives as well as analysts say recent trends suggest no abating in demand for gold, known for its safe-haven status, as the precious metal is still among the best investment products available and its traditional appeal remains intact. ?The US economy is in bad shape; the European economy is in doldrum. So gold prices may continue to rise further. Moreover, what is the other safe investment product that is giving more returns than gold? Investment in gold is still attractive,? Sanjeev Agarwal, chief executive of Gitanjali Export Corporation , told FE.
India is estimated to have imported bullions worth a record $58 billion in 2011-12, compared with $42 billion a year before. Domestic gold prices have risen by 32% in 2011, thanks to the global financial crisis and a weak rupee. The decision to discourage gold imports followed apprehensions by economists and analysts that large purchases of an idle asset like gold from overseas will jeopardise the government?s efforts to harmonise balance of payments as well as current account deficit.
World Gold Council managing director (India and Middle East) Ajay Mitra said wedding season demand and underlying inflationary pressure in the economy will be key drivers of gold demand in the country, although the recent cut in interest rates may raise options for investment.
?Even housewives are buying gold coins, hoping to convert them into jewellery in future when they will marry off their kids. The reason is they believe prices will go up in future,? Mitra said. He added many gold buyers have adopted a wait-and-watch approach since the Budget announcements for clarity to emerge.
?We expect that gold prices may hover in a broad range of R27,300 to R28,950 (for 10 gm) for short term in Indian markets and $1600-$1700 ( for an ounce) in international markets…. Key support to watch is at R27,300 level in Indian markets and $1,600 level on Comex,? Amarsingh Deo, head of commodities & currencies research at Aditya Birla Money, said in a latest report.
Lakshmi Iyer, head of product and fixed income at Kotak Mutual Fund, said geo-political tension and an expected marginal fall in gold prices due to profit-booking may again push up demand for the precious metal. Investment in exchange-traded gold funds will likely pick up again after sluggishness in demand in the past three months, she said, adding that demand has surged due to the Akshaya Tritiya on Tuesday.
Investment in gold ETF on Akshaya Tritiya rose 145% to R846 crore in 2011 from a year before, according to NSE data. Demand has been rising at a compounded annual growth rate of a whopping 189% since 2007 for Akshaya Tritiya. The NSE has extended its trading hours on Tuesday to cash in on demand.
Some other analysts, however, remained more cautious. ?The first quarter of 2012 has been appalling in case of the yellow metal which has risen by more than 6% as against an average gain of more than 11% in case of global equities. The figures are surprising given the ongoing European economic woes along with heightened uncertainty over quantitative easing in the US economy,? a research report by Angel Commodities said on Tuesday. ?While the long-term bullish trend in gold is expected to remain upbeat… but from here on, sharp upside in gold is expected to be restrained in the medium-term due to the mixed macroeconomic views and sentiments,? it added.
