The Hindu Business Line : Domestic demand for gold waning

Mumbai April 19 Domestic gold demand has been hit by rising interest rates, which have made investible funds expensive, while a strengthening rupee has made gold imports cheaper, notwithstanding strong international prices.

The Indian bullion market generally takes its cue from international prices. There is demand compression as a result of high and volatile prices, according to traders.

Gold imports by India were down 10 per cent (68 tonnes) to 679 tonnes in 2006 compared to 747 tonnes in 2005, according to data from GMFS, the leading precious metals consultancy firm.

(India is the world's largest consumer and importer of the precious metal.)

The average local prices rose by 38 per cent to Rs 8,916 for 10 gm in 2006, from Rs 6,455 in 2005, the data showed.

"Compared with this time last year, domestic demand for bullion is almost 30-40 per cent lower in Mumbai," said Mr Prithviraj Kothari, Director of Riddhi Siddhi Bullion. Last year, demand was more than 1,000 kg a day.

This has now fallen to 200-300 kg on an average, he added.

Festival demand had briefly generated interest a few days ago, but it is waning now.

It is believed that rising interest rates have encouraged investors to opt for fixed deposits that earn 10-11 per cent annual returns.

Gold prices are already ruling at very high levels and therefore, may not give returns as high as fixed deposits, said Mr Kothari.

On the other hand, while a weak dollar provides positive support to gold, a strong rupee keeps domestic prices in a tight range, and therefore, curbs higher returns.

Recent appreciation of the rupee (to 41.91 against the dollar) means a muted price performance by gold in the domestic market, contrary to the strong bullish international trend.

Globally, commodity investors are eyeing the new psychological mark of $700 an ounce. Gold peaked at $691.40 on Wednesday in the London spot market.

Prices are expected to range between Rs 9,350 and Rs 9,500 for 10 g, Mr Kothari added.

If the rupee were around 44 against the dollar, gold prices would have been well above Rs 10,000 for 10 g, said Mr Bhargav Vidya of B.N. Vidya & Associates.

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