Commodity Trade Mantra

Why is India’s Gold Demand, the Best Hope for Gold Prices

Why is India's Gold Demand, the Best Hope for Gold Prices

Why is India’s Gold Demand, the Best Hope for Gold Prices

The main boost to gold prices in 2017 may well come from India, formerly the world’s top consumer of the precious metal.

Indian gold demand was pummeled in 2016, falling 21 percent to 675.5 tonnes from 857.2 tonnes the prior year, the biggest yearly decline in volume terms recorded by the World Gold Council.

One of the main factors driving the slump was the government’s ongoing efforts to attack the informal economy, culminating in the removal of high denomination 500 and 1,000 rupee notes in November, a demonetisation that effectively removed some 86 percent of bank notes by value.

In an economy where most transactions are still cash, the impact was to crimp retail gold demand as liquidity dried up.

But there are positive signs that India is recovering, with gold imports jumping to 50 tonnes in February, up more than 82 percent from the same month in 2016, according to data provided by GFMS.

While some of this was likely due to what GFMS called the release of pent-up demand, it’s also possible that stronger economic conditions will lift Indian demand for jewellery, the main driver of that market.

While India is looking more positive for gold, it’s worth noting that China, the world’s largest buyer, is less constructive, with soft jewellery demand and the lack of a clear price trend deterring investment appetite.

It’s likely that the best-case scenario for China this year is one of steady demand, with the main X-factor being the value of the yuan, as a depreciating local currency may spur Chinese investor appetite for gold as a hedge.

Another potential positive for gold is the usual suspect of geopolitical risk, although if elections in France and Germany follow the recent Dutch vote, where anti-European populists did less well than expected, it may not add much to gold demand from a risk perspective.

Overall, it appears there is no clear price trend for gold, and looking at a cross-section of forecasts from analysts shows hat those who are bearish are only mildly so, while those bullish are also expecting modest gains at best.

While the ebb and flow of news events will drive daily price movements in gold, it would appear that a driver to move the gold price away from the $1,100 to $1,300 an ounce range is lacking. – Clyde Russell

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