How regulatory environment and rural demand impact gold prices

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Published: December 20, 2017 1:37:15 AM

For the areas still not sufficiently penetrated by the banking system in the country, gold still provides a lot of financial security to rural people as it can be mortgaged for receiving immediate liquidity during an emergency. No wonder, with such affinity, India is the second largest consumer of gold in the world.

Gold has held emotional value for Indians from time immemorial.

Gold has held emotional value for Indians from time immemorial. Despite India being a country with a large rural population with low per capita income, gold holds equal sway over both rich and poor. From childbirth to marriage; from religious festivals to social occasions, gold is the most favourite precious metal for donation. For the areas still not sufficiently penetrated by the banking system in the country, gold still provides a lot of financial security to rural people as it can be mortgaged for receiving immediate liquidity during an emergency. No wonder, with such affinity, India is the second largest consumer of gold in the world. While nearly three-fourth of the country’s gold demand is in the form of jewellery, India constitutes around 27% of the global gold jewellery market.

Eventful year

The year 2017 is an eventful year for this precious metal with dynamic demand and pricing scenarios. From demonetisation to introduction of GST, from changed Know Your Customer (KYC) norms to 45-day strike of jewellers, the commodity has seen a lot of events affecting consumer behaviour. Demand for gold, which dropped drastically post demonetisation in line with other commodities, started picking up from the beginning of the year. Pent-up demand pushed imports to jump 15% to 123.5 tonne during the January-March period of this year, a World Gold Council report said. However, introduction of GST from July acted as a spoiler. Gold jewellery demand fell by 25% during July-September period. Changed KYC norms introduced in August also played its part in the overall demand environment. The gems and jewellery industry was brought under the umbrella of Prevention of Money Laundering Act, making it mandatory to comply with KYC documentation for all transactions of Rs 50,000 and above. This severely dented rural demand where cash transactions were widely prevalent. Jewellers throughout the country had also protested the move of introduction of PAN cards for all jewellery purchases above Rs 2 lakh and went on a 45-day long strike. Eventually, the notification was rolled back in October providing much-needed relief to the industry. Meanwhile, frequent policy changes have taken its toll on gold demand. Domestic gold consumption saw a sluggish demand in FY17. Total wealth held by individuals in gold was `68.45 lakh crore with a marginal growth of 3.86% as compared to 15.31% last year.

Pricing outlook

Commodity prices usually take a cue from international markets and gold is no exception. Factors like rate hike by US Federal Reserve, geopolitical events like those arising out of North Korea and demand from key markets like China and India will definitely influence gold pricing going ahead. Gold is also highly sensitive to US interest rate hikes. Spot gold has inched higher from December last year to trade at around US$1,290 per ounce in November this year. However, sustenance of current price level will hinge on US Fed’s decision on rate hikes in the coming days. In India, gold price has witnessed a marginal hike of 1% in FY17. Going ahead, demand and pricing of the commodity will critically depend on rural demand and stabilisation of regulatory environment. Performance of equity market is also an indicator to watch out for as it may prompt some shift in asset allocation, impacting investment related demand of the yellow metal.

Times are changing

Demonetisation and introduction of GST are slowly changing the buying pattern of consumers with digital payments slowly making its way into a cash dominated industry. As awareness is increasing, consumers are opting for purchasing digital gold at market-linked prices over buying physical gold coins. Some e-payment firms have introduced ‘Digital Gold’ to facilitate buying of the commodity in digital form. Further, introduction of sovereign gold bond schemes by the government is intended at encouraging buyers to hold gold in paper form.

Extracted from India Wealth Report 2017 – Karvy Private Wealth

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