Gold sentiment to remain soft in India in 2020, says world body

KR Srivats New Delhi | Updated on January 16, 2020 Published on January 16, 2020

Gold price volatility and high taxes may deter Indian consumers: World Gold Council

Consumer and gold trade sentiment may remain soft in India through 2020, the World Gold Council (WGC) has said.

However, structural reforms undertaken in the country will support demand in the long term, WGC said in its latest ‘Outlook 2020’ report.

“In India, policy reforms designed to bring transparency and an orderly trade structure to many sectors of the economy are expected to improve confidence, remove inefficiencies and promote growth. We expect these factors to be a long term positive for gold demand although their effects may take time to become apparent,” the report said.

Clearly, WGC sees gold price volatility and higher taxes deterring Indian consumers. Tax cuts have to be introduced as a credible incentive to spur economic growth, the report said, highlighting that higher taxes are exacerbating the impact of the record high local gold price on consumption.

While the introduction of mandatory hallmarking for gold jewellery at the beginning of the year may enhance consumer trust, this potential initial disruption should not be ignored, WGC has said.

David Tait, Chief Executive Officer, WGC, who was in India last week, had expressed hope that India would have a ‘spot exchange’ for gold this calendar year.

A ‘spot exchange’ — when it becomes a reality — is expected to usher in transparency and thereby benefit consumers and small jewellers.

Indications are that the gold consumption in India slipped in 2019 as against the level in previous year.

On the mandatory hallmarking initiative, PR Somasundaram, Managing Director India, WGC, said this reform, backed by a tight enforcement mechanism, will underpin trust and a change of perception about Indian gold jewellery, creating a favourable environment to market our famed handcrafting skills appropriately.

To make this a smooth success, government and the industry players should also create a strong consumer pull, through consumer awareness campaigns, he said.

“Hallmarking will also create a level playing field, benefitting small players”, he added.

Gold shines in 2019

In 2019, gold had its best performance since 2010, rising by 18.4 per cent in US dollar terms last year. The yellow metal outperformed major global bond and emerging market stock benchmarks over that period.

WGC believes that financial and geopolitical uncertainty combined with low interest rates will likely bolster gold investment demand. Net gold purchases by central banks will likely remain robust even if they are lower than the record highs seen in recent quarters.

“Momentum and speculative positioning may keep gold price volatility elevated. And that gold price volatility, as well as expectations of weaker economic growth, may result in softer consumer demand near term but structural economic reforms in India and China will support demand in the long term”, the WGC report said.

Looking ahead, investors — including central banks — will face an increasing set of geopolitical concerns, while many pre-existing ones will likely be pushed back rather than being resolved.

In addition, the very low level of interest rates worldwide will likely keep stock prices high and valuations at extreme levels.

And although investors may not step away from risk assets, anecdotal evidence suggests they are increasing exposure to safe haven assets like gold as a means to hedge their portfolios, according to the WGC report.

Volatility may rise

As the gold price significantly rose in 2019 so did volatility, but, similarly to other assets, it remains well below its long-term trend.

“We don’t anticipate a reduction in gold volatility near term. Should the economic and political environment deteriorate, it may even rise, especially as gold volatility historically exhibits a positive skew in such circumstances, tending to increase,” said the WGC report.

Published on January 16, 2020
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.