Lower gold prices may bolster Indian demand in H2 - WGC

By Rajendra Jadhav

MUMBAI (Reuters) - India's gold demand in the second half of 2015 could rise by more than a quarter from a year before as lower prices encourage buying during the peak festival season towards the year-end, the World Gold Council (WGC) said on Thursday.

Stronger demand from the world's second-biggest gold consumer could support the global bullion price, which hit its lowest in 5-1/2 years below $1,100 an ounce last month.

But growth in demand could be lower if monsoon rains turned out to be weak, Somasundaram PR, managing director of the WGC's Indian operations, told Reuters.

Last week the India Meteorological Department (IMD) forecast this year's monsoon rain would be 88 percent of the long-run average as a strengthening El Nino weather pattern was likely to trim rainfall in August-September to 84 percent, which has raised fears of the first drought in six years.

"Assuming that we have the scenario that IMD has predicted, then certainly it will lead to muted rural demand during Diwali," Somasundaram said.

Demand for gold jewellery is usually robust in the final quarter as the country celebrates festivals such as Diwali and Dussehra, when buying the metal is considered auspicious. Rural demand for gold accounts for nearly two-thirds of India's total.

In the first half of 2015, Indian demand fell 7 percent from a year before to 346.2 tonnes, led by a 19 percent drop in investment demand, WGC data showed.

Better returns from the stock market, a belief that gold prices would fall further and curbs on banks' selling of gold coins squeezed investment demand and the trend is likely to continue in the second half, Somasundaram said.

He estimated total demand in 2015 would rise nearly 11 percent to about 900 tonnes, anticipating 554 tonnes in the second half, an increase of nearly 26 percent from a year before due to lower prices.

Indian gold prices fell to their lowest level in four years in July, although that failed to produce the long queues outside gold showrooms that were seen when prices fell in 2013.

"Many people are waiting for prices to come down further. If prices move up, these people will move in and stock up quickly. It will accelerate the buying," Somasundaram said.

Spot gold touched a three-week high of $1,126 an ounce on Thursday as a weaker Chinese yuan kept equities under pressure, encouraging investors to seek safe-haven assets.

Higher imports by banks and other trading companies pushed gold prices in India to a discount over London prices in May and June, making smuggling less attractive. In 2014 smuggling networks had brought in an estimated 175 tonnes of gold.

Such imports had come down "dramatically", Somasundaram said. "The incentive to smuggle is very low."

(Reporting by Rajendra Jadhav; Editing by Alan Raybould)