Precious Metals Outlook
Indian Jewellery Demand Weak; Chinese Demand Helping
Fill the Gap
Last week, India’s Finance Minister announced that the country plans to double the
import duty on gold. While the duty remains relatively small (it would increase to
approximately 1.4% on bars and 3.5% on jewellery at current prices) this will
almost certainly have a negative impact on Indian gold demand at a time when it is
already suffering. The recession and high gold prices have already had an impact –
the Bombay Bullion Association has estimated that gold imports were down 50
percent in the first half of the year. In addition, the Indian monsoon season is late
and is expected to be below average, which could further reduce gold demand (a
strong monsoon leads to a strong harvest).
However, other forms of gold demand continue to increase, including gold demand
in China – while Indian demand falters. Chinese jewellery demand continues to rise
and now represents approximately 15% of world demand, closing in on India at just
over 20% (Exhibit 2). As well India’s bullion imports have remained strong in
recent years as other products such as gold coins gain in popularity. While we
continue to see some near-term risks to the gold price, we believe that potential
inflation fears and seasonal factors could drive the gold price higher in the fall.