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Bleak outlook for jewellers as record prices, fading demand hit gold sales

Jewelers in India, the top consumer after China, are facing a bleak outlook as record high prices and fading demand threaten to drag annual gold sales to the lowest in three years.

With demand growing 9% during the January-June period, jewelers were expecting consumption to increase after a subdued couple of years. Those hopes are evaporating after a combination of high taxes, record prices, slowing economic growth and floods in the South Asian country are poised to erode demand in the peak festival season that begins later this month.

“Everything is hitting us at the same time,” N Anantha Padmanaban, chairman of the All India Gem & Jewellery Domestic Council, said by phone. Full-year demand is expected to be at par with 2016, when consumption slumped to a seven-year low of 666 tonnes, as buyers restrict themselves to wedding-related purchases, he said.

India’s consumption of goldhas been affected by the government’s efforts to curb its trade deficit and measures to discourage investors who used the metal to evade taxes. Prime Minister Narendra Modi’s administration increased the import tax on the precious metal in July, which pushed domestic prices to an all-time high of Rs 38,666 ($541) per 10 grams last week. Goldfutures in Mumbai have gained about 17% since June on local factors and in tandem with overseas spot gold, which has rallied to a six-year high as the US-China trade war plays out.

"A 5% or 7% jump itself was very difficult for us to convince the customers," Padmanaban said. "But with a 20% hike in just 30-40 days, it is going to be hell for the next one or two months."

The higher prices coincide with a slowdown in the Indian economy. Latest high-frequency indicators from auto sales to exports show demand at home and abroad is waning. A lingering crisis among shadow banks has curbed borrowings by consumers and companies, and an uncertain monsoon is casting a shadow on rural consumption and wages. Imports, which comprise almost all the gold that India consumes, slumped to the lowest monthly inflow in July since at least March 2016.

“Everybody is asking the organisation to do something to promote sales. But prices have to settle down,” Padmanaban said. “Even if we do a festival, at these prices customers won’t react immediately.”

More gains Often consumer demand in the second-half of the year is more than 400 tonnes but it will be closer to 300 tonnes this year, Georgette Boele, senior FX and precious metalsstrategist at ABN Amro Bank NV, said in an email. India’s purchases during January to June totaled 372.2 tonnes, according to the World Gold Council, the highest for the period since 2013.

With recession fears shaking the global market as the trade war drags amid a turmoil in the equity and bond markets, gold will continue to climb further with many analysts forecasting a run up to $1,600 an ounce level.

Courtesy - Business Standard

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