Gold demand in India rose this week due to a festival. Local prices adjusted to an appreciating rupee, even as the possibility of further US rate hikes kept a check on rise in prices overseas.
Due to the ongoing wedding season and the festival season, physical demand has been on the rise. Gudi Padwa festival, also known as Ugadi in some parts of the country, was held towards the end of March. Buying gold during festivals is considered auspicious in the world's second-biggest market and this was no exception.
Dealers in India were charging a premium of up to $1 an ounce during the previous week over official domestic prices. They were charging a premium of $2 the week before that. Gold rates in India includes a 10% import tax. Expect demand to remain firm next month too due to another festival, Akshaya Tritiya, and because of the start of the wedding season.
This after India's February gold imports had surged to 50 tonnes, up more than 82% from a year ago, on pent-up jeweller demand and as retail consumers ramped up purchases for weddings, provisional data from consultancy GFMS estimated.
This February, retail demand improved due to the wedding season and as cash supplies became normal. India's gold imports in 2016 had fallen nearly 44% versus 2015 to 510.4 tonnes, the lowest level in 13 years.
We began the calendar year with a interest rate hike by the US Federal reserve and question over demand in the 2017, due to de-monetisation. However, as per recent trends, consumption and imports are on the rise, as jewellery demand has been recovering.
In November, Prime Minister Narendra Modi had scrapped 500- and 1000-rupee banknotes, notes that made up 86 percent of the value of cash in circulation, as part of a crackdown on corruption, tax evasion and militant financing. Though, the use of cash restriction in buying gold persists and is a irritant to investors commonly used to buying the yellow metal using cash, the industry has shown a mature approach in embracing the restrictions and strictly adhering to them, as it is towards a larger cause of cleaning the monetary system.
The Indian rupee has risen almost 5% against the US dollar so far in 2017, partly offsetting gains in overseas gold prices. The local currency appreciation also brings stability to prices. This has come as a blessing in disguise for buyers who were postponing purchases expecting a correction in prices.
Jewellery demand has been good so far this year, but investment demand is still weak. Though a small portion of gold is still being bought as a safe-haven against any fall or uncertainty in stocks, both globally and locally, investors seems to be allocating more in equities after the recent election victory of BJP in Uttar Pradesh, the largest state in the country.
The rise in imports by the world's second-biggest consumer of the precious metal is expected to support global prices that are near their highest level in 3-1/2 months. Internationally, gold remained steady with global political uncertainty, the upcoming elections in Europe in particular, seen as supporting prices of the yellow metal, driving gold to its best quarter in a year.
President Trump has been a true saviour for gold. An unorthodox economic and political approach from the US President may further bolster investment activity. With the stock markets at the peaks both domestically and internationally, any large declines there could restoke investment demand that could trigger a further rise in prices. Gold has over the past two decades, proved itself as an safe-haven investment in times of both economic and political uncertainties, which is why it continues to be favoured by investors.
Conclusion: The return of physical demand in India after two successive droughts is a huge cushion for international gold prices and with the ongoing wedding season and the upcoming list of festivals, the prospect of a further rise in demand looks bright.
Gnanasekar Thiagarajan is a Director at Commtrendz Research and a consultant to commodity bourses and corporations both in India and the overseas. He has more than 20 years of experience in commodity and forex trading and was formerly a forex dealer with the Bank of Nova Scotia.
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