It has been quite some time since gold has been in the limelight. But, as the title of Bob Dylan’s 1964 song has put it, “The Times They Are A-Changing”. For reasons many and varied, the yellow precious metal has swung back into action. At the time of writing in early July, the heft of hard, concrete data on gold was available only up until the first quarter (Q1) when, according to the World Gold Council, gold demand surged 16.1 percent quarter-on-quarter (qoq) and 20.5 percent year-on-year (yoy) to 1,289.8 tonnes (t) to record the strongest Q1 ever. In US dollar terms, the price of gold pole-vaulted 16.2 percent in Q1. This was followed by another meaningful, if less impressive, rise of seven percent in Q2, such that at the end of June, gold was fetching US$1,321.1, the highest it had reached since end-February 2014.
Investment demand driving the rally
Alas, however, gold demand’s best-ever start to the year was driven by investment demand. Jewellery had nothing to do with the rally as demand for jewellery purposes plummeted on sharply increased prices and market-specific factors: in Q1, it slumped 19.3 percent yoy and 27.3 percent qoq to 481.9t, a four-year low. This actually represented an acceleration of the general downtrend in jewellery demand for gold over the past couple of years: in 2014 and 2015, it fell 7.3 percent and 3.4 percent, respectively.
As mentioned above, gold’s spectacular run thus far in 2016, marked by double-digit gains in dollar and other currencies, has been fuelled predominantly by investment demand. Unforgettable readers may still recall that I have remarked in this space more than once in the past that economic times are always hazardous to fathom and forecast but arguably no more so than here and now, when uncertainty abounds – and more than proportionately at that. Indeed, unforeseen and unforeseeable twists and turn in the world economic and financial landscape have coalesced to form a favourable environment for gold investment in recent months.
Among the first to come to mind are the seemingly incessant downward revisions to global growth (actual and expected), the dearth of reasonably priced and potentially rewarding investment alternatives, and the receding expectations of increases in interest rates from their prolonged abysmal levels as unconventional quantitative easing and negative interest rate policies are implemented in one country after another. On 24 June, the British people voted, if only by a narrow margin, to opt out of the European Union, whereupon the price of gold shot up by four percent in just one day, reflecting the unknown and unknowable impact of “black swans”.
Gold jewellery demand the weak link
Against this backdrop, why has gold demand for jewellery fallen away as it has? There is, in the first place, the negative impact on quantity demanded of a sharply higher price. In some contexts, this adverse price effect is compounded by a debilitating income effect as economies slow down. China is a classic case. There, the demand for gold jewellery shed 4.4 percent qoq and slumped 17 percent yoy to 179.4t in Q1 for the reasons just cited. Notwithstanding a jump in January and early February, courtesy of the Chinese New Year, jewellery demand fell off visibly in the second half of Q1 as the Mainland’s relatively anaemic economic performance – real gross domestic product (GDP) growth of 6.7 percent was the lowest Q1 since 2009 – weighed on consumers’ propensity to buy.
Meanwhile, a supply-side squeeze impaired the market further as retailers countrywide were busy adjusting their stocks in March in order to replace existing inventories with stocks that comply with new hallmarking requirements. During Q1, gold jewellery supply came under additional pressures as lines of credit were restricted as domestic banks tightened the conditions under which they would lend to jewellery manufacturers and retailers.
Indian jewellery demand in spotlight
Onto India. There we found jewellery demand hogging the headlines in Q1 and even beyond. The market nearly seized up in March as a powerful mix of soaring prices and industrial action protesting government policy made for a turbulent quarter. Surging prices sent a strong signal to Indian consumers to hold off on buying gold jewellery until prices regained a semblance of stability.
Then, in the government’s budget brought down on 29 February, Finance Minister Arun Jaitley announced that jewellers would have to pay a one-percent excise duty on gold. Upon this shocking news, the jewellery traders across the country struck work for six weeks to oppose the impending levy. The nonstop media coverage of the strike virtually guaranteed that customers would stay away, even from non-striking shops and outlets. Under the circumstances, India’s demand for gold jewellery was, of necessity, weak. Quarterly demand of 88.4t was at its lowest in seven years as well as down 41.4 percent yoy and 51 percent qoq.
However, not all is lost. Q1 demand has conceivably been delayed rather than lost. Most retailers reopened in the second half of April, in advance of the Akshaya Tritiya festival early in May and the advent of the wedding season. The budget is rural-supportive. This, and expectations of an above-average monsoon, should lend further support to rural incomes, with positive connotations for gold demand in times ahead. Most importantly, the government has recalled the budget decision to collect one-percent tax at source on gold purchases above Rs 2 lakh, amidst a steep decline in demand for gold in the country. The rollback spells major relief for jewellers and for those wishing to buy gold and jewellery in bulk.
India and China rule the roost
There are also grounds for qualified optimism insofar as the prospects for gold jewellery demand in China are concerned. For one thing, the spectre of a massive depreciation of the renminbi (RMB) has so far been grossly exaggerated (RMB weakness will, all else being equal, inflate the price of gold in local-currency terms, deterring some would-be, budget-conscious Chinese consumers). For another, the slowdown of the Chinese economy, while continuing on many fronts, appears to be tailing off, with a soft landing rather than a hard one on the cards.
The significance of the Indian and Chinese markets for gold jewellery demand cannot be underestimated, for the two combined typically accounts for over half of the world total offtake. Elsewhere in Asia, consumers are essentially price-sensitive in their purchases. Thus, jewellery demand decreased in most of the region’s smaller markets in Q1. A notable exception, however, was Vietnam, where jewellery demand was up 6.8 percent yoy and 20.5 percent qoq. This can, of course, be attributed in part to a relatively encouraging economic scenario as Q1 real GDP growth quickened to 6.7 percent from 6.5 percent in 2015.
Vietnam and US buck the trend
Also worth noting is that in the United States, Q1 jewellery demand for gold grew 2.3 percent yoy. This marks the 9th straight quarter of yoy increase, remarkable for a market whose economic growth has been subpar after the Great Recession. The industry continues to benefit from retailers resuming offerings of gold products, having previously thrown in the towel. Gold jewellery imports into the United States in January and February were strong, suggestive of American consumers’ continued desire for gold jewellery. This was reflected in encouraging official sales numbers showing stronger-than-expected growth in January’s jewellery sales. The outlook for the rest of 2016 is cautiously optimistic.
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