It was bound to happen. With a higher rate of import duties being imposed by the Government of India, gold demand in the number two consumer of the yellow metal fell in the first quarter of 2014 as compared to the same period last year, according to a report recently released by The World Gold Council. The story, the WGC said, is the same for number one consumer China, though the reasons were far different.
Consumption in the the World’s Largest Democracy
Consumption in India was down by 26 percent to 190.3 tons, with gold jewelry intake falling 9 percent, and coin and bar buying down 54 percent.
The Indian Government already raised the import tax on gold to 10 percent from 2 percent in an effort to tackle a runaway deficit and stem the Indian rupee’s slide against the US dollar.
The government brought in the 20:80 scheme by which an importer had to ensure that at least one-fifth, or 20 percent, of every lot of imported gold was exclusively made available for the purpose of exports and the balance for domestic use.
Consumption in China
But India can take heart for its neighbor, China, too, witnessed a drop in gold demand in the same period. The WGC in its ‘Gold Demand Trends’ report said demand in China fell 18 percent to 263.2 tons, with Chinese demand for gold coins and bars down 55 percent in the first quarter. The situation was somewhat salvaged by a 10 percent rise in jewelry offtake to 203 tons. China has overtaken India as the number one gold consumer in the world.
Despite consumption showing a decline in the No. 1 and No. 2 nations, the good news, said the WGC, was that overall gold consumption in the first quarter held steady at 1,074.5 tons. European central banks even recommitted to not selling large quantities of the precious metal.
What Does it Mean for Gold?
World Gold Council’s Alistair Hewitt, one of the authors of the report, was quoted in the Economic Times as saying, “We saw quite a divergent market – we saw gold flowing out of Exchange Traded Funds (ETFs), and as the price fell, you saw consumers around the world surge into the market and buy a lot of gold.”
He said events in Q1 2014 were a move away from those extremes and the market was now a bit more stable. Coin and bar demand may have come down but ETF outflows, on the other hand, also subsided.
For the entire year, the WGC predicts Chinese gold demand to be between 1,000 and 1,100 tons, and the Indian gold demand to be between 900-1,000 tons.
Overall, gold prices are up by over 7 percent since the beginning of 2014. They hit a peak mid-March but climbed down due to the release of positive US economic data and the Ukraine crisis.
Indian gold import norms eased
Better days seem to be ahead for Indian gold consumers. India’s central bank, the Reserve Bank of India (RBI) on Wednesday announced the easing of import rules for gold. Analysts feel this could spur imports into the country for the rest of the year.
The RBI said it was easing up gold import norms by allowing select trading houses, in addition to already permitted banks, to procure the precious metal to boost exports. The RBI had, in July of last year, imposed severe restrictions on gold imports. The central bank tied imports with exports and prescribed the 20:80 formula, but the facility was extended to select banks only and other entities were barred from importing gold entirely.
The new notification says star trading houses/premier trading houses, which are registered as nominated agencies by the Director General of Foreign Trade (DGFT), may also import gold under the 20:80 scheme.
Many in India have welcomed the RBI move. Bullion analysts were hopeful that the new Narendra Modi/BJP government in India would be bullish on gold. Even the WGC has said India’s gold demand was likely to pick up from the second half of the current year due to the easing of import rules. A step up in imports for India would give impetus to global gold prices, too.
Sohrab Darabshaw contributes an Indian perspective on industrial metals markets to MetalMiner.