Elevated prices, fewer weddings and election-related restrictions will likely impact consumer demand of gold, according to World Gold Council (WGC).
However, any price stability ahead of Akshaya Tritiya could provide some respite, said Kavita Chacko – Research Head, India of WGC.
At the same time, gold’s continued strong performance this year could encourage investment demand, she said.
The recent speed and magnitude of the gold price rises have been unprecedented. While it took nearly a year for domestic prices to rise from Rs 50,000 per 10gm to Rs 60,000 per 10 gm, the rise from Rs 60,000 per 10 gm to Rs 70,000 per 10gm took little more than five months.
Anecdotal evidence 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/selling old jewellery to benefit from windfall gains. Demand is also likely impacted by election-related restrictions and fewer weddings this year (April-May), said the WGC India research analyst.
At the same time, physical investment demand (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.
Demand is unlikely to experience a meaningful uplift over the next couple of months, particularly while general elections take place (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 (10 May) if prices stabilise as this is traditionally considered to be an auspicious time to buy gold.
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/oz, down from US$24/oz in 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 narrowed possibly indicative of pockets of gold demand here, said Kavita Chacko.
Gold prices have rallied since mid-February to reach unprecedented levels. Prices rose by 3.1% in April following an 8% surge in March.
“Our 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 or LBMA Gold price in March (up 8%), owing to the relative stability in the INR. To date in April, however, the domestic landed price has risen by 4% (to Rs 72,403/10g) versus 3% in the LBMA Gold Price, due to a depreciation in the INR (0.4%) against the USD.
