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G. Chandrashekhar

Mumbai , Sept. 8

FOR bullion marketers in countries such as India with large unsatiated demand for gold, the latest World Bank forecast that over the medium-term, prices are expected to fall below $300 an ounce as supplies from all sources exceed demand is sure to raise visions of a pot of gold at the end of the rainbow.

High prices of the yellow metal since early this year have had a negative impact on consumer demand not only in India, but also in other countries. In the first quarter of 2003, jewellery demand fell by more than 10 per cent with declines in both developed and developing nations, Global Economic Prospects 2004 pointed out. India which is the largest gold consuming country in the world — with estimated consumption of around 700 tonnes per annum — demand fell 13 per cent in the first quarter, in addition to a 20 per cent decline in 2002.

Indian demand for gold is impacted by changes incomes and prices. Gold consumers in the country suffered a double whammy with rising prices and falling incomes. A setback to agriculture following drought in northern parts of the country resulted in a sharp fall in rural incomes, while high international prices— for various reasons including geo-political concerns— kept the domestic market firm.

According to the World Bank, high prices will continue to weaken the price-sensitive jewellery demand market, and stimulate investment in new production and from scrap. Even below $300/oz, mine production is expected to continue to increase moderately as new low-cost operations come on stream, the report said.

While official Central bank sales are continuing, decision of the central banks whether to further stem official gold sales when the Washington Agreement expires in 2004 will determine medium-term prices.

Interestingly, the first quarter's year-on-year fall in jewellery demand was sharply reversed in the second, chiefly as a result of lower and more stable prices. This was most apparent in India where consumer demand for gold showed a massive increase to 184 tonnes in the second quarter of 2003 from 103.5 tonnes in the first quarter of the year and up 36 per cent from 135.2 tonnes of the second quarter of 2002.

With satisfactory south-west monsoon rains, the agricultural crop prospects in India look bright.

Stage is set for a recovery in farm output and higher incomes in rural areas where two-third of the population lives.

This should drive demand for gold sharply up. According to Gold Fields Mineral Services, consumer demand for gold in India fell to 547.3 tonnes in 2002 from 709.7 tonnes in 2001. Now the market for gold here is set for a robust rebound.

Fortunately, for the Indian market, the rupee has been remarkably gaining strength against the dollar, which makes gold imports less expensive.

A reduction in customs duty on gold import granted in February 2003 came as a bonus.

Kharif 2003 harvest is expected to commence soon leading to generation of incomes. Consumers continue to be fascinated with the yellow metal. As a matter of fact, the ongoing festival season has already started to give a boost to gold purchases.

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