Many people wrote-off gold in 2014 and 2015 as investors turned to equity markets and domestic mutual fund investments surged. Globally, too, foreign investors started moving investments back to the US to the safety of the dollar, following volatility in emerging markets from the slump in crude oil and metals.
But after three years of decline, the price of the yellow metal in India has surged in 2016. Internationally, too, gold has jumped 15% since January to over $1,200 an ounce this month, erasing the 9% drop in 2015.
With global growth concerns remaining and markets still volatile, investors have begun flocking back to gold, always been considered a safe-haven asset.
Global gold demand rose 21% to 1,290 tonnes in January-March, according to the World Gold Council. Buying in gold exchange-traded funds (ETFs) has been the highest since 2009 and in the first fiscal quarter, ETFs saw inflows of 364 tonnes of gold, compared with just 26 tonnes last year.
Gold drivers remain strong globally, said Somasundaram PR, India MD, World Gold Council. “There is no more that strong agreement that the US economy has revived. There are still a lot of questions around revival in China, there is negative interest rates adopted by Japan…So internationally, factors driving prices are very robust and are not going to go away in the short-term.”.
In India, gold prices have risen almost 20% since January, compared with a 6% drop last year. While prices were close to `25,400 per 10 grams in January, they hit `31,000 this month, and are still trading over `30,000. Analysts see a further 10-20% upside this year.
In January-March, gold demand in India dropped 39% due to a 45-day long strike by jewellers, which hit even wedding shoppers. People postponed buying hoping, that the government would cut duties on gold and prices would drop. However, the Centre announced an additional 1% excise duty on non-silver jewellery. With jewellers back in business, there is a pent-up demand for the yellow metal, analysts said.
“There are lack of alternative investment avenues as equities remain volatile. While there could be some short-term correction, gold could hit new high before December this year,” said Kishore Narne, head of commodity and currency at Motilal Oswal.
After robust inflows for nearly 20 months, domestic mutual funds are beginning to see net sales in March and April as retail flows have slowed. With expectations of a good monsoon this year, rural consumption is likely to pick up in the second half of 2016 and that, coupled with falling interest rates on deposits could boost demand.