The World Gold Council (WGC) expects India’s gold imports to reach 350-400 tons in the second quarter (April to June), 200 per cent higher than a year earlier and almost half of last year’s total imports. This also compares to imports of 256 tons in the first quarter of 2013.
India’s bar and coin investment rose 52 percent to 97 tonnes over the period, while jewellery demand reached 160 tonnes, the WGC said in a recent report.
Asian gold demand during the three months to June will reach a quarterly record as bullion consumers in the region take possession of supply freed up by selling from exchange-traded funds (ETFs), the council said on Wednesday.
Gold prices fell to their lowest in over two years at $1,321.35 an ounce in mid-April on signs of economic improvement in main markets and fears that central banks around the world could start to curtail their bullion-friendly policy measures.
The move scared investors in the West, triggering a sharp liquidation of speculative and ETF positions. Lower prices also prompted strong physical demand from price-sensitive countries such as India and China, which together account for more than 50 per cent of consumer demand for bullion.
Chinese coin and bar demand hit a quarterly record of 109.5 tonnes in the first quarter, up 22 percent, and jewellery consumption rose to 185 tonnes. The council will publish its second-quarter demand trends report in mid-August.
WESTERN INVESTMENT
Gold investment in the West, however, plunged this year as a brighter view of the U.S. economy prompted investors to favour other assets such as stocks over bullion.
As of the end of April, ETF holdings fell by 13 percent or 350 tonnes, with half the outflows recorded over the past month.
Holdings in the world’s largest gold-backed ETF, SPDR Gold Trust, have lost 74 tons since the start of April, compared with outflows of around 120 tons in the first quarter. These investment vehicles, which issue securities backed by physical metal, had proved a popular way to gain exposure to the gold price since the start of the financial crisis.
“We don’t expect to see anything like the same exit of gold from the ETFs that we’ve seen in the first four months of the year … the pace of redemptions is flattening out now,” Grubb said.
10 reasons why Gold Prices in India may hit Rs. 21,000
Gold expensive over the long term: In real terms (dollars adjusted for inflation), the average price of gold over the very long run (150 years) is around $520 an ounce against $1,391 an ounce currently, Credit Suisse says. Clearly, gold continues to be expensive over the long term average despite the sharp correction this year.
- Gold expensive against other commodities: Gold remains expensive when valued against hard assets, such as base metals and U.S. real estate, as well as against other investment classes such as US equities, Credit Suisse says.
- Global stock markets are at record highs. Besides, equities offer some dividend yield as well, which means the opportunity cost of holding gold has become too much to bear for many investors, Credit Suisse argues.
- Inflation no more a risk: Investors buy gold to hedge against inflation. However, policymakers in the developed world have failed to generate even moderate 2-2.5 per cent inflation, Credit Suisse says. So, gold as an inflation hedge is losing its charm as the prospects of a sharp move in prices remains remote. (Also read:
Why 2013 may not be the year of gold) - No imminent collapse of financial markets: The European Central Bank’s commitment to preserve the euro and the determination of other leading central banks to underwrite risk and the recapitalization of financial institutions means reduced risk and thus reduced demand for insurance in the form of gold, Credit Suisse says.
- No threat to dollar: There have been numerous stories about the potential outbreak of “currency wars” amongst the major industrialized economies leading to forex instability. However, if everyone eases together, it will in theory not impact cross rates, Credit Suisse argues.
- QE coming to an end: The U.S. Federal Reserve has been printing money to shore up the U.S. economy. This liquidity has been driving up asset prices including gold. Credit Suisse says at least 435 tonnes of gold could be liquidated once the Fed withdraws quantitative easing, thereby putting further pressure on gold prices.
- Central banks are not buying gold despite falling prices and any intervention by them to support prices looks unlikely, Credit Suisse says.
- No support to gold prices from high production costs: While cost inflation across the gold mining sector has been high, the marginal cost (the change in total cost that comes from producing one additional item) is unlikely to provide support to gold price in the short to medium term, Credit Suisse says.
- Gold in bear territory: Going by the past trends, a 60 per cent retracement of the 2005 to September 2011 rally over the two and a half years would take gold back to around $1,000 an ounce (nominal) by the end of March 2014, Credit Suisse says.