India retains its position as largest gold consumer
With 6 per cent rise in overall demand to 890 tons last year, India continues to be world’s largest gold consumer. China on the other hand recorded 9 per cent fall in demand due to global macroeconomic factors.
Gold’s current rally is likely the result of global macroeconomic factors. The tumult in the Chinese stock markets at the start of the year extended to the world markets, causing equities to fall. The overall performance of the world equity markets is reflected by the MSCI All Country World Index ETF (ACWI). The fall in equities brought investors to haven assets such as gold. Gold’s performance is reflected by the iShares Gold Trust ETF (IAU).
India and China are the world’s two largest consumers of gold, and together they make up about 50 per cent of gold’s global demand. Gold is treated more as a commodity in these two countries, and its demand is relatively inelastic. Even gold’s near 9 per cent surge in price since the beginning of 2016 hasn’t curbed its appeal. Instead, buying seems to have picked up.
Asian market bullish on gold
In India, the relatively nominal rise in demand despite the annual average price declining 6 per cent was attributed to poor monsoon leading to drought and heavy crop losses in major gold consuming regions in the western and northern parts, said a study conducted by Thomson Reuters.
Drought in some regions forced marginal farmers to sell their jewellery, resulting in an 11 per cent increase in scrap volumes. Additionally, the floods in Chennai and Puducherry placed a dark cloud over the festive season post Diwali. In these markets footfalls have been low and those heading out have been forced to consider other household necessities over jewellery, the study said.
Gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving fundamentals including revival of pent-up demand in Asia and contraction in global mine production, according to The Hindu Businessline. The study expect a slow recovery in gold prices in dollar terms this year, with the price trading above $1,200 an ounce towards year-end and averaging at $1,164/oz.
Gold buying is usually at its peak during this time of the year. Also, more than fundamentals driving gold’s price, right now, psychological factors are in play. Global unrest, especially in China, is prompting more money to be parked in gold. India also seems bullish on gold after its price recovery.
India offers discount
Further to this, the dealers of gold in India were forced to implement discounts of $10 per ounce to the global spot to go along with the trend of the prices. Indian gold traded at $405.86 per grams, hitting a five-month high. The Indian government had increased the import tax on gold to ten percent to limit demand, however, far from their expectation, the smuggling of the precious metal surged.
“People are liquidating stocks they imported at the lower price in December. Since demand is weak, they have to offer discounts. Retail consumers are struggling to adjust to higher prices. They are postponing big purchases hoping the government will reduce import duty in the budget,” said Saurabh Gadgil, vice president of Mumbai-based India Bullion and Jewellers Association (IBJA) to FX News Call.
The rise in gold’s price also boosted mining-based stocks, which had tumbled in 2015. Silver Wheaton (SLW), Franco-Nevada (FNV), and AngloGold Ashanti (AU) have risen 9.8 per cent, 6.4 per cent, and 31.3 per cent, respectively, in the past 30 trading days. These three stocks together make up 4.2 per cent of the price changes in the Market Vectors Gold Miners ETF (GDX), as per reported in Market Realist.