India is the second-biggest gold consumer in the world after China and a lower demand in Q1 and Q2 of 2018 has lowered global prices, which had risen by 8% since December 2017. Despite demand looking to increase in 2018 to between 700 and 800 tonnes, versus the 727 tonnes last year, Indian demand for 2018 is still expected to be lower than the10-year average of 840 tonnes. The reason for the decrease is due to a higher import duty as well as an increased goods and services tax on bullion imposed in 2017. New anti-money laundering laws, which mandate disclosure on gold purchase over 50,000 rupees, also played a factor in the decreased demand.
Prime Minister Modi’s government raised the goods and services tax (GST) by more than 50% in July of 2017, from 1.2% to 3%. For high-value gold acquisitions, the government has also made it mandatory for gold customers to disclose their Permanent Account Number (PAN), for income tax purposes. Despite these changes, seen as dampening gold purchases, we previously discussed on Corporate Ethos that the World Gold Council (WGC) welcomed India’s new gold policies. The new initiatives aim to increase gold demand and develop gold backed financial products to make it easier for investors to buy gold, as well as establish a regulated, centralised exchange throughout the country, which will create a more efficient and transparent market.
The addition of gold to the Prevention of Money Laundering Act (PMLA) in August 2017, however, only served to dampen gold demand which plunged 25% in the third quarter. Additionally, the 10% import duty imposed in 2013 caused a surge in gold smuggling in India, which was expected to continue unless the government reduced the import tax. The apparent rebound in the fourth quarter of 2017 was helped by lower gold prices and the festive buying for Dhanteras. The removal of the metal from the PMLA, at the end of September, also helped consumer sentiment. According to Business Today’s trend report from the WGC, this saw the total jewellery demand up 12% at 562.7 tonnes in 2017, compared to 504.5 tonnes in 2016.
Yet, the demand for gold jewellery in 2018 fell again nearly 12% year-over-year to 87.7 tonnes before Q1 ended, compared to the same period last year, according to this news report by The Economic Times. This has been attributed to the rising price of the precious metal and jewellers facing issues transitioning to the new GST. The demand for gold bars and coins ebbed as well, falling by 1% to 27.9 tonnes. The Reserve Bank of India’s (RBI) recent repo rate hike at the beginning of June may also have exacerbated this slump, with the RBI pointing out selling pressure on gold prices due to strength in the US dollar. The forecast, however, points to a reinvigorated gold market, with the rural market expected to pick up during the coming monsoon season. Moreover, after increasing backlash, the government reduced the import tariff by $18 to $413 per 10 grams, as of October 1st, 2017.
The future outlook looks favourable and rural demand for gold is expected to see a major boost if the monsoon season stays consistent with weather predictions in July and August. As a result of the monsoon, farm output will greatly increase which in turn will boost spending on gold. FXCM notes that gold is still one of the most sough-after investments in the metals market. It is used as a nest egg for many and as a safeguard against inflation or economic events, which could negatively impact other financial holdings. The government’s initiative in creating a centralised gold exchange will also help this positive momentum. Therefore, despite seeing a turnout lower than the 10-year average, the upward trend, with minor market adjustments, will continue in 2018 and should reach its nominal range of 800-900 tonnes by 2020.
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