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Gold may lose its glitter in India

business Updated: Aug 26, 2012 21:46 IST
Sachin Dave
Sachin Dave

Gold consumption and imports are set for a sharp slowdown in India as a wobbly world economy, weak rupee, patchy monsoons and a slowdown in the broader economy threaten to take the sheen out of the yellow metal’s sales in the coming months, say analysts.

Gold prices hit an all-time high of Rs 31,300 for 10 grams on Friday. It has risen 35% over the last one year as investors in Europe and the US flock to add more glitter to their investment portfolio rather than park funds in volatile equity markets.

In India, a weak domestic currency that has slid more than 12% since March, has further fanned imported bullion prices.

Gold imports have fallen more than 56% to 131 tonnes during April to June this year, industry body World Gold Council said in a report released last week. Hardening prices will further knock down gold demand in India, the world’s largest cbullion consumer, say analysts.

“Gold consumption is set to go down and so the gold imports could be down by around 35-40% by the end of this year,” said Atul Shah, head, commodities, Emkay, a broking and research firm. “India’s fall in demand would impact the total demand of the yellow metal, which is a function of price.”

Besides, deficient and late monsoon is set to trim food output and hit farm income, which supports two-thirds of Indians, or about 800 million people. Rural spending on most items — from television sets to gold — goes down with inadequate rains and farm output.

Nearly 60% of India’s gold demand comes from rural areas, mostly during weddings.

India is the world’s largest market for gold jewellery, accounting for more than 1,000 tonnes of gold ornaments in 2011.

Economists have attributed India’s widening current account deficit — the gap between export earnings and import payments — to rising gold imports, among other causes.

India’s gold import had jumped nearly 50% to $60 billion in 2011-12 from the previous fiscal year, pushing the current account deficit to a record $78.2 billion or 4.2% of GDP.

This had prompted the government to hike import duty on gold. “The government’s decision was based on the rationale that expensive gold would hit its demand and consumers would buy other goods. Consumers buying gold in no way contributes to the functioning of the economy as that money is locked in the metal,” said a senior banker.