Ahead of Diwali, there is cheer within the gem and jewellery fraternity over the Indian government’s decision to take the sector out of anti-money laundering legislation.

This has been widely welcomed after the trade was hit by a series of unfriendly legislations over the last one year, including demonetisation on November 8 last year, followed by the introduction of Goods and Services Tax on July 1. There has been palpable unease, anxiety and uncertainty within the industry in recent months.

The application of PMLA (Prevention of Money Laundering Act) was particularly seen as onerous for compliance, as it mandated customer identification and reporting of all cash transactions. Given that the trade has traditionally been run more on cash (with its concomitant implications), the trade was upset. Customers, too, were reluctant to be identified.

While the government’s earlier decision to apply PMLA to ensure transparency and audit trail was laudable, it had to rescind the order possibly because of market pressure. There has been no meaningful explanation for the withdrawal of the earlier order – someone in the government owes an explanation. There is, of course, some hint that after Diwali and wedding season, there will be a new legislation to document jewellery sales/purchases with appropriate value limits.

Demand scenario

Be that as it may, despite taking gem and jewellery out of PMLA and providing sentimental relief to trade and consumers alike, the demand scenario is most unlikely to undergo any dramatic improvement. For one, the agriculture situation is not as robust as expected. Large parts of the country have faced deficient rains, and rural incomes – a key driver of gold demand – are not expected to rise significantly.

Post-harvest months – October to March – are traditionally considered as auspicious months for conducting weddings, particularly from mid-January onwards. Demand during the period should be considered as non-speculative and for genuine consumption purposes.

In other words, while gold import remained strong in the first half of the year, it has slowed in the last couple of months, and the underlying consumer demand has remained rather soft. Discussions with top jewellery brands across the country suggest that consumption demand has been below expectation and weak in the third quarter. Of course, a decent pick up in the fourth quarter is expected because of seasonal factors.

Meanwhile, as argued in these columns earlier, international prices have moved well below $1300 an ounce. Central bank interventions seem to weigh on gold prices already. The prospect of a further rate hike by the US Federal Reserve in December this year is now widely anticipated. It will pressure gold further down and a breach of $1250/oz is expected first, followed by a test of $1200/oz.

Rate hikes

There is also belief among market observers that along with the US Fed, the ECB may also start to shrink its balance sheet, while the Bank of England may announce the first rate hike in a decade. Cumulatively, these monetary policy actions together with soft demand, especially in India, do not augur well for gold prices in the coming months.

The negative or below-market expected US employment data for September initially helped the yellow metal, but there is unanimity that jobs data will bounce back in the coming months and allow the Fed to press ahead with a rate hike.

(The author is commodities market specialist. Views are personal)

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