2017: Note ban to shave off a third of gold demand , jewellers cautious

Jewellers are cautious about selling gold without bills as they fear getting caught

Demonetisation is expected to shave off 300 tonnes of India’s gold demand, which is unlikely to come back in a hurry. 

Average monthly gold imports, which has been around 65-70 tonnes for the past few years, halved between February and September this year. In October and November, there was a recovery on account of festive buying and marriage season. However, demonetisation is expected to result in a drop in demand. 

Sudheesh Nambiath, lead analyst, precious metals demand, South Asia & UAE, GFMS, Thomson Reuters, said, “Our estimate is that 300 tonnes of gold demand, which was predominantly cash-based buying will be shaved off in 2017.”

Average annual gold demand for the past seven years has been 875 tonnes, and around 85-90 per cent of this gold is imported. Analysts said around 20 per cent of the demand was met through smuggled gold. 

According to GFMS estimates, in 2014, 187 tonnes of gold was imported unofficially, which declined to 142 tonnes in 2015. In 2016, gold smuggling is expected to fall further because of overall weak demand and huge discounts. 

Jewellers and bullion dealers used to sell the smuggled gold unofficially in cash, without issuing bills. Jewellers were also selling legally imported gold in cash to customers who were parking their black money in the precious metal. Both the categories of gold sales will stop after demonetisation, as people do not have adequate cash. 

Around a third of the gold demand comes from agricultural households, according to field visit reports by GFMS. Most of these purchases are also in cash, and the acute cash shortage will result in lower demand even from rural households.  

Analysts also said that genuine buyers were also likely to postpone gold purchases. All of these were reasons for analysts to cut the country’s gold demand by a third for 2017. 

Since October, there were hopes of a revival in India’s gold demand following a good monsoon after two years of drought, which would have seen gold buying in rural markets. However, thanks to the note ban, many farmers had to sell their produce at lower prices. Since they have less cash, that demand will not be seen in 2017. 

Jewellers, who were the first to be caught in the fire of investigating agencies, have now became too cautious about selling gold or jewellery without bills. There isn’t much black money in the system either. Even when agriculture income recovers, there will be little surplus left for parking in gold. The demand from investors, who bought gold as part of their portfolio diversification, too, is likely to be muted as they have not seen returns from the metal over the past four years. With the cash crunch likely to prevail, gold demand was not going to revive until consumers shrugged off the note ban shock. The only real demand for gold at present is for marriages, which will continue as in the past.