Demonetisation affects gold demand, long term looks good: WGC

Bar and coin investment is expected to be 250-300 tonnes by 2020: WGC

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Gold demand in India - the world's largest consumer - has been affected in the short term because of the shock demonetisation, but long-term prospects are encouraging with consumption to average at 850-950 per annum by 2020, the World Gold Council (WGC) said today.

While the main demand will be for jewellery, bar and coin investment is expected to be 250-300 tonnes by 2020. Jewellery exports are estimated to touch the USD 40 billion mark, from the current USD 8.6 billion.

Stating that transparency across the value chain is necessary for gold to be mainstream, WGC said gold trade will become more transparent with introduction of GST, mandatory hallmarking and a massive push by organised jewellers to promote non-cash payments.

However, the latest cash ban exercise should also expand the tax base and the positive impact on public finances could generate a more benign and gold-supportive policy approach, it suggested.

There has been short-term impact on gold demand in the country due to demonetisation as there were fears that the government may cap gold holdings and gold buying. Buyers stayed away for a brief while, said Somasundaram P R, head of WGC's India operations, after unveiling the report titled India's Gold Market -- evolution and innovation.

Since it is difficult to say right now how much of an impact the demonetisation move had on gold demand, WGC is still analysing it and will come out with a detailed report soon, he said.

"As of now, we still maintain that overall gold demand will average at 650-750 tonnes in 2016. Definitely, demand will be at a lower range," he said.

India's gold demand stood at 441.2 tonnes in January-September of 2016. Demand during Diwali and for weddings held up well until November 8 when the government announced ban on Rs 500 and Rs 1,000 notes, according to the WGC.

Gold smuggling is expected to be higher in 2016 because of 1 per cent manufacturing excise tax. About 119 tonnes are estimated to have been imported through unofficial channels in 2015, it said.

Observing that cash crunch is taking a toll on gold demand in the short term, WGC in the report said even genuine gold buyers are reluctant to buy wedding jewellery as there is panic after taxmen investigated some jewellers who had, immediately after demonetization, created opportunities to convert old currency for fake or back-dated sales.

The caps on withdrawals from banks and lack of cash in ATMs meant that whatever cash available was largely spent on essential items -- in both rural and urban India -- it added.

Small jewellery businesses, particularly in rural centres, will feel the pinch until cash becomes more freely available, the council said further.

Stating that India's economy is going to be strong and will support the gold market, WGC Market Intelligence Director Alistair Hewitt said, "In 2016, India was one of the world's fastest growing economies. While the economy was rocked by the shock demonetisation programme, it will bounce back and that will support the gold market in years to come."

Given that the outlook for income growth is positive, by 2020, "we expect Indian gold demand to average 850-950 tonnes per annum".