Low demand for gold, yet prices are sky-rocketing

Every year India imports 800–900 tons of gold which makes India one of the largest consumers of the gold in the world. In India, gold has been used as an umbrella during rainy days because of the lack of robust social welfare systems. There was a time when the Government of India (GOI) had to request people to limit gold consumption as it was widening the country’s current account deficit (Import of goods > Export of goods). As repercussions, GOI had raised import duty on gold. Gold prices in India include 12.5% import duty and 3% GST.

But it was a very different scenario in the month of April. Last year in April, India imported 110.18 tons of gold whereas this year in April it is ONLY 50 KGS. No one has ever seen such kind of demand destruction happening. Gold imports plunged 99.5% (YoY) to their lowest in the last three decades. In value terms, April imports dropped to $2.84 million from $3.97 billion a year ago.

Why the demand for physical gold has decreased in India?

Definitely, Coronavirus deserves some credit here 😜

  • There is a complete lockdown in India since 16th March (no jewelry shops are open) which has drastically reduced the demand for gold. Sales are zero during the lockdown.
  • Gold purchased during Akshaya Tritiya is considered auspicious but this year people were confined to their homes during the festivals which decreased the demand for gold.
  • Generally, on wedding season demand increases, but this year all the weddings either got postponed or canceled, which further impacted gold demand.
  • Switzerland is the largest exporter of gold in India. The impact received a further jolt when local authorities in Swiss announced that production in the area was to be temporarily halted.
  • Logistic Constraints — No foreign transportation is allowed to cross the Indian border as the nation tries to check the spread of coronavirus. It resulted in large scale disruptions in supply chains and resulting in the cancellation of orders.

Even though the demand for gold is decreasing, yet you see prices are upsurging. Gold ETFs saw the highest quarterly inflows for four years amid global uncertainty and financial market volatility.

Let’s see what factors are rallying the gold prices:

  • Stock markets are going down. The empirical findings suggest that gold has a negative correlation with the equity market. The investors looked to park money in safe-haven assets like gold. Gold acts as a hedge against inflation, and historically its value has appreciated during uncertain times, war, pandemic, or an economic slowdown.
  • The central bank has taken a dovish stance, which means keeping interest rates very low. So instead of keeping deposits in banks, people are investing more in gold. Also, low to negative yields on high-quality government bonds which have reduced the opportunity cost of holding the metal compared to government bonds.
  • The World Gold Council data reveals that central banks across the world aren’t taking any chance with the uncertainty looming. They are maintaining healthy gold reserves amidst times when global economic and geopolitical uncertainty has heightened.
  • Geopolitical tension between the USA and China has also added fuel to a price hike.
  • The benchmark price for crude oil in the United States fell to a negative $37.63.

How will it impact the Indian economy?

  • It’s definitely a positive move for the Indian economy. The import of gold will narrow the current account deficit which in turn supports Rupee (Indian Currency) level.
  • Gold prices are skyrocketing. People will avoid buying gold. Instead, they will recycle the old gold and take advantage of the higher gold prices, which will further curb gold import, and India will be able to save more foreign reserves.
  • More Indians are likely to turn to gold loan companies to raise money against the precious metal to combat the loss arises due to coronavirus. Recycling and collateralized loans against gold may be expected to grow exponentially in the next few quarters

When will demand for physical gold upraise?

  • It is unfortunate that the impact of the current lockdown on the gold jewelry industry is extremely stressful. Once the lockdown is lifted it will take time for the industry to get to normal business.
  • Demand for gold looks bearish in the near future. People would first try to buy essentials after the lockdown and in the end, they will think about luxury goods like gold.
  • Manufacturing in this industry has also taken a hit due to scarcity of man force, who have returned to their hometowns after the virus outbreak.
  • Most jewelry markets in India are located in the very congested spaces of the cities. Be it Zaveri Bazaar in Mumbai or Chandni Chowk in Delhi. Thus, implementing social distancing, or adequate safety measures for micro and small enterprises is going to be extremely challenging. So, people will avoid going to these places, which will impact SMEs.

An investor should allocate 10–15% of their portfolio money into gold. It is a positive yielding asset that acts as a hedge against rupee depreciation. Investing in gold exchange-traded funds (ETFs) or gold mutual funds or buying sovereign gold bonds are some of the other ways one can get exposure to gold.

Gold prices in India might still rise in the near future due to Covid — 19 crisis but selling out of stocks to fund a gold purchase wouldn’t be wise for everyday investors because it’s a move guided by panic. Stick to your investment plans.

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