Gold demand falls 29% in March quarter on new taxes, Re woes

May 18 2012, 00:41 IST
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SummaryAs we previously forecast it is likely that China will become the largest source of demand for gold in 2012.

Indian consumer demand for gold declined by 29 per cent to 207.6 tonnes during the January-March period of 2012 as uncertainty over taxes imposed on gold and prices weighed on investment plans of consumers. China remained the worlds top gold consumer for the second quarter in a row, with its consumer demand rising 10 per cent to 255.2 tonnes.

The World Gold Council (WGC) expects Indian gold demand to fall to 800-900 tonnes in 2012 from 933 tonnes in 2011. With gold demand largely met through imports, this should benefit Indias current account, at the margin.

Gold demand in India was affected in the quarter by a number of factors like a new tax on gold jewellery, increases in the import duty for gold and weakness and volatility in the rupee, WGC said in a report. Jewellery demand fell 19 per cent to 152.0 tonnes in the same period of 2011. Investment demand was down 46 per cent from the previous year at 55.6 tonnes. In May, the government withdrew the new tax on jewellery and the market is already responding positively, WGC said.

Marcus Grubb, managing director, WGC, said, China and India have seen continuing economic growth and whilst Chinas economy is expected to slow, it will nonetheless surpass the rates of growth in the West. As we previously forecast it is likely that China will become the largest source of demand for gold in 2012. This growth story also extends to other emerging market economies and is reinforced by central banks continued buying of gold, as a diversifier and a preserver of national wealth. The current picture of the gold market is diverse and not withstanding a flight into US dollars and treasuries near term, we believe the fundamental reasons for investing in gold today remain very strong and compelling, he said.

Gold demand as an inflation hedge remains strong. However, with average WPI inflation likely to be lower in 2012 and the rupee continuing to depreciate and adding to volatility in gold prices, analysts expect investment demand to be more subdued this year.

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