Volatile Gold Prices Make Consumers Confused

A perfect business atmosphere is created in India before commencement of wedding and festive seasons with the rainfall has been so good so far and prices of gold have also come down drastically. But consumers here seem to be in a confused status of mind with many adopting a ‘wait & watch’ approach in hope of further slop in gold prices.

Sagging demand for gold as safe haven, a slowing in the Chinese economy and equity markets plus expectation of the US Federal Reserve raising interest rates, thus strengthening the dollar, are three main reasons for the downfall in gold prices. More interestingly, India Ratings and Research (Ind-Ra) predicts that in the event of a US rate hike, global gold prices may come down in range between USD 900 per oz. to USD 1,050 per oz. As a result, the gold prices in India may decline and range between INR 20,500 per 10gm to INR 24,000 per 10gm from the current levels (INR 25,000+). The agency maintains a negative outlook on domestic gold prices for 2016.

A Bloomberg News Survey done by industry experts says, “Gold prices will drop to USD 984 an ounce before January 2016. That would be the lowest prices of the yellow metal since 2009. Gold is out of fashion today. The prices are not going to collapse but they would remain at a lower level in near future.”

So the continued volatility in prices of the yellow metal has pushed the domestic consumers in ‘confused status’ and kept Indian jewellers worried, with expected weak demand from both domestic and foreign markets. Industry leaders also present a rather cautious estimation.

Mr. Vipul Shah, Chairman of the Gem & Jewellery Export Promotion Council (GJEPC) says, “When China has restricted purchase of jewellery, India has also introduced strict measures on jewellery purchase by making a PAN card mandatory beyond certain level of bill, to identify purchasers. This has resulted in buyers keeping away from fresh purchase. So, the perception is that jewellery demand would remain weak in the coming months.”

Mr. Mohit Kamboj, President of the India Bullion and Jewellery Association (IBJA) also hold a similar view. He thinks the jewellery demand in Diwali season this year would be 40% less than last year. “In a volatile scenario, consumers abstain from fresh purchase amid expectation of a further fall in gold prices. They will wait until bullion prices start moving upwards. Cautious sentiments in rural India will also result in lower gold demand.”

Interestingly, Mr. Somasundaram PR, the Managing Director of World Gold Council’s (WGC) India operations holds a different viewpoint. He says, “An improvement in monsoon rains along with a downfall in gold prices is expected to boost purchase of the yellow metal in India. Demand for gold jewellery, coins and bars is likely to touch 900-1,000 tons in 2015 from last year’s 842.7 tons.”

If we talk from the investors’ point of view, recent drop in the gold prices to a five-year low level has discouraged them to a great extent. Falling gold prices over the last couple of years reduced its charm on one hand, a sharp rise in domestic equity markets in the calendar year 2014 on the other hand has further reduced its attractiveness. During last one year, while the rise in stock markets has become incremental in fund flows by retail investors into equities, the demand for gold was on a decline and even the gold exchange traded funds run by mutual funds witnessed net outflows from their schemes.

Although the sentiments around gold remain weak and prices are expected to remain low in the near future on account of strengthening dollar, investment experts advise that investors should take it as an appropriate opportunity to purchase some gold as part of their asset allocation rather than sell out their gold assets and exit because it is an investment that preserves its value in the long-term which provides protection against inflation.

Posted by Suresh Chotai