Gold consumption set to grow first time in 3 years

Tags: Commodities

Rising income and inflation likely to boost investment demand

Gold use in India, the world’s biggest buyer, may climb for the first time in three years as rising incomes and inflation boost investment demand, undermining efforts to narrow a record current account deficit.

Consumption may total 865 tonnes to 960 tonnes this year, compared with 864.2 tonnes in 2012, Somasundaram PR, managing director of the World Gold Council for India, said in an interview in Mumbai. The gain in imports will match the increase in demand, he said. The country imported 860 tonnes last year, according to data from the council.

India has tripled the tax on imports since the start of 2012 to moderate demand as gold accounted for almost 80 per cent of the current account deficit, the broadest measure of trade. Gold rallied for 12 straight years, driven in part by demand from investors looking for a store of wealth amid concern about inflation. Goldman Sachs Group predicts the rally will end as a US economic recovery gathers momentum.

“Imports should be higher this year according to initial estimates based on the trend in the fourth quarter of last year and as the economy grows,” Somasundaram said. “There is a sense of optimism in the economy and we can feel it.”

Consumption in India surged 41 per cent to 261.9 tonnes in the quarter ended December from a year earlier, data from the council showed. Demand for jewellery rose 35 per cent, while investment in coins and bars jumped 51 per cent, it said.

Finance minister P Chidambaram has taken steps in recent months to open the economy to more foreign investment, spur exports and speed up stalled road and rail projects to revive the weakest economic growth in a decade. The Reserve Bank of India (RBI) cut the benchmark interest rate for a second time on March 19. The window for further cuts may close unless consumer inflation of almost 11 per cent and a record current account gap abate, according to Deutsche Bank.

“While the current account deficit is a serious issue, increasing the duty and trying to stop gold demand is not the positive way and is not going to yield results,” Somasundaram said. The US economy is showing signs of improvement and will in turn boost exports from India, helping cut the current account shortfall, he said.

“Demand should be supported by multiple structural factors, including inflation concerns and income growth,” James Steel, an analyst at HSBC Securities (USA), said in a March 18 report, referring to India’s gold consumption. “A stronger rupee would lower gold prices in local currency terms, thereby boosting demand.”

Inflation in India has averaged almost 9 per cent in the three years through 2012, prompting the central bank to raise interest rates 13 times as government spending fuelled price gains. Consumer prices are rising almost 11 per cent, or at a record pace, and inflation continues to be “a worry,” finance minister Chidambaram said in a March 15 interview.

“Any decline in Indian gold demand is cyclical and the metal will remain a preferred asset,” Sanjay Mathur, Singapore-based head of economic research at RBS, said in a report on March 14. “Negative real deposit rates accentuate the appeal for gold as an alternate investment,” he said.

Gold is a critical and predominant form of saving in rural India, which makes up about 70 per cent of the population, according to Nilesh Mundra, head of investment strategy for private banking at ICICI Bank. The nation’s second-largest lender by assets estimates households hold $1.1 trillion of gold, which accounts for about 7 per cent of their total wealth.

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