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Is gold losing its sheen – demand slowing down in India and China?

08 Sep 2016 |By: Team Finalaya

Gold sheen

From ancient civilizations to the modern days, gold has always enjoyed the store value attached to it, and more so when the global financial markets are hit by hurricanes and tornadoes.  But, this singular attribute cannot be of significant help to people who need some amount of volatility in the market to make trading in gold attractive for punters.

After kissing its highest peak at about $2000 per troy ounce back in August 2011, 5 years later, the price is languishing at about $1323. Thus, over the 5 year horizon, gold has lost as much as 33%. We will now look into the factors that keep gold prices low and what could trigger a possible surge in prices.

Demand supply equilibrium

The largest retail consumers of gold are China and India. In the last couple of years, China’s economy has been less than healthy, and the initial euphoria when China opened up its retail gold market in 2013 has tapered down, thanks to the intermittent tremors experienced by the Chinese economy.

As for India, the economy is strong and the disposable income with the lower and upper middle class Indians is rising. Yet, gold imports in India have been consistently dropping across 2016. In July 2016, the estimated gold import by India stood at a meager 20 tonnes which is the lowest for a month in several years and about 80% down compared to just an year ago. For once, gold was selling at a discount of $50 to $100 in the spot markets in India.  Jewelers and gold retailers in India are an unhappy lot today because all their efforts to perk up demand have not produced even a fraction of the expected results.

Adding further pain, scrap supplies have also surged significantly influencing lower import of the yellow metal.  Is that perhaps an indication that smarter Indian women are converting their ancestral gold into cash when the tide is still high?

Security concerns

Today, just about 30 grams of gold worn on the body of a person translates to a little over Rs. 1 lac. Those who are really affluent, seldom flaunt their gold jewelry, nor do they use public transport.  The primary concern for the middle class Indian women is their personal safety since they become very vulnerable targets for criminals. Not a day passes without at least one incident of chain snatching across major Indian cities. One should also hope that the upwardly mobile middle class Indian women are shifting to a wide range of fashion jewelry which is significantly inexpensive and offers much wider choices.

Multiple gains if the trend continues

If the current trend continues, it can bring multiple gains for the Indian women as well as the nation.  At the prevailing prices, gold as an investment vehicle does not make much sense. Safety and security aspects should also weigh in on those who are considering fresh investment into gold. For the nation, lower gold imports would impact the balance of payment and the finance minister would love the numbers.

Consider the advantages of gold bonds

Those who are still interested in gold investment to diversify their portfolio may consider sovereign gold bond. Gold bonds carry an interest of 2.75% per annum and this is a big incentive.  You don’t have to store physical gold or incur expenses for bank lockers. Upon redemption you get pure gold of equivalent value without losing any making charges or process waste in the case of jeweler. In conventional investment on gold, your returns are only when the price moves up and the jeweler will be quick to come up with all the reasons to pinch your pocket again. Here are more details on the gold bond scheme from the Government of India.

Are our ladies listening please?

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