DeMo has reinforced faith in gold: WGC
Mar 09 2017 , Chennai
Fiat currencies are those not backed by a physical commodity, like gold. All currencies are now fiat currencies, including the rupee and the dollar.
WGC had conducted a consumer research in Q1 2016 in which 63 per cent of respondents agreed with the statement “I trust gold more than the currencies of countries”. Seventy-three per cent of respondents had agreed that gold makes them feel secure for the long-term.
“The demonetisation programme will underpin these beliefs,” finds WGC. The shock initiative will have tested some peoples’ faith in fiat currencies and reinforced their faith in gold. In one stroke, the government had taken away 86 per cent of currencies in use.
Demonetisation is also boosting large jewellery retailers, and they will continue to grab a larger share of the market. Over time, consumers will move away from cash towards digital payments, and organised players should benefit from this trend. This change in market dynamics will result in more transparency and a better deal for consumers, protecting them from shady practices such as under-carating, finds WGC.
After a challenging 2016 and demand falling so sharply, WGC expects that demand is unlikely to fall further. Banking system flush with liquidity, the bumper crop after a good monsoon, and central government employees’ and pensioners’ inflation-busting wage hike will all support economic growth. GST will streamline India’s byzantine tax structure which, as well as boosting the economy, promises to make gold’s value chain more transparent. Further ahead, the economy will benefit from the groundswell of young Indians entering the workforce– a demographic dividend similar to that which underpinned the stellar growth of the Asian Tiger economies of the 1980s and 1990s. All these factors will boost India’s economic growth and support gold demand.
However, WGC has kept a modest demand projection for 2017. The ban on cash transactions over Rs 300,000 could hurt rural Indian demand, while GST could adversely affect the industry in the short term.
“India’s gold demand has fallen sharply in the past, but has then recovered. Previous attempts by the authorities to clamp down on gold have failed: gold is too intimately ingrained in Indian society. On balance, while demand is likely to improve, our view for 2017 is cautious: we expect consumers to buy between 650 tonnes and 750 tonnes,” said Somasundaram PR, managing director, WGC India.
Over time, WGC anticipates that economic growth and greater transparency within India’s gold market will push demand higher and by 2020 the demand will go up to 850 – 950 tonnes.