India's gold demand may cross China's: World Gold Council's John Reade

In a Q&A, the council's Global Chief Market-Strategist said the price of gold will face headwinds in the near future

John Reade, Global Chief Market-Strategist at the World Gold Council was in India last week. In an exclusive interview with Rajesh Bhayani he said the price of gold will face headwinds in the near future. Edited excerpts:

Gold prices are very high despite burgeoning inflation. What is your reading of the situation?

A strong dollar and rising interest rates are driving gold prices to where they are now. When the price of gold was higher in 2020, a higher inflation rate was anticipated, which happened with a little lag. As the US Federal Reserve has been raising (interest) rates, the price of gold has more headwinds ahead. As long as the US Fed keeps surprising the market with rate increases, gold will face headwinds. There is a risk, however, that a very sharp increase in interest rates will hurt growth, and see the US economy eventually slip into sharp slowdown, though no such signs are seen yet. This could lead to stagflation which is a good scenario for the gold price to rise. Any dip in gold price could be an opportunity to buy. However, from India’s price perspective, if the USD weakens and gold price recovers, then in rupee terms a rebound in prices may not be of similar strength.

What we see today is not an end of gold, it’s just part of the cycle.

In view of the emerging price outlook for gold, do you see demand coming under pressure?

Looking at the Indian physical market, it's possible. We know that when the gold price rises rapidly, India’s physical gold market remains on standby. Sharp rises or falls are not seen positively. The Indian market loves stability. So, short-term pressure on demand slowdown isn't ruled out. I'm not concerned about long-term demand.

Looking at other regions, China’s gold demand has weakened due to Covid-related restrictions and may remain weak for the rest of the year. I won't be surprised if India’s gold demand surpasses that of China in the near term. There have been some pockets like North Europe, North America where demand was seen. However, so far as gold demand for investment is concerned, the overall scenario is currently not in favour.

High import duty for gold in India is also a concern for demand, isn’t it?

We hope this (high duty on import) is for the short term and will be reversed.

How do you see gold supply going forward when the price outlook is not rosy?

Sixty per cent of gold supply comes from mines. The rest is mostly recycled old gold jewellery. Mine supply is likely to moderate even though there have been some new discoveries and new mines have also come up. Supply from old gold also depends upon the quantum of strain on the economy going ahead. Old gold supplies have been higher when prices spike. That is not the case now and hence gold supply is likely to moderate.

The international gold exchange has started operations at India’s International Financial Centre at GIFT city. Do you see the exchange emerging as a global gold trading hub?

What I see is that the exchange is designed for routing gold imports in India through it and removing middlemen in imports. And that objective can be easily achieved. Even the bullion exchange at GIFT City will facilitate domestic gold exchange functioning. However, making GIFT City IFSC a trading hub for gold will not be easy as it requires a great deal of |liquidity on the exchange.

What are your views on the aggressive marketing of digital gold in India?

This is yet another channel for gold buying. And it has huge potential. However, whoever is buying digital gold should know who the counterparty is. If the company from whom you are buying digital gold goes bankrupt then whether or not you can get your gold is an important factor.

What do you think of RBI's decision to buy gold for its forex reserve?

RBI has bought 13 tonnes according tp the latest data available with the WGC. This is sharply higher than its monthly average gold purchases the past few years. RBI has set an example for other emerging markets' central banks. We don’t know about RBI’s future plans but feel it will continue adding gold to its reserves.