Gold’s expensive, India feels the pinch finally.

MUMBAI: Soaring global gold prices are taking a toll on gold demand with imports recording a distinct slowdown during April and May.

Imports of gold have halved to 17 tonnes in May from 34 tonnes in April. Indians are now becoming price-sensitive to gold unlike in the past when demand continued to be strong despite rising prices.

Despite overseas gold rising to a record $1,266 an ounce (31.15 gms), local gold dipped by Rs 60 per 10 gms from Saturday’s close to Rs 18,790, thanks to a stronger rupee. India imports 97% of its gold requirement annually, and a stronger rupee makes imported gold cheaper.

“Although jewellery demand is typically price inelastic, the run-up in prices has begun to hurt consumption,” notes a report by Citi’s Rohini Malkani. The report also notes that RBI’s 200 tonnes purchase of gold from the International Monetary Fund (IMF) last year has helped fuel perception of gold as a reliable asset class and supported investment demand for gold.

India is one of the largest consumers of gold globally, with total demand at 480 tonnes in 2009. However, higher prices have hurt consumption last year. Jewellery demand accounts for a substantial portion of total demand (75%); although gold is becoming an attractive investment class as well. Commenting on the trend, Prithviraj Kothari, director of the Bombay Bullion Association and director of Ridhi Sidhi Bullion said demand for gold is insensitive to prices mainly during festivals and the marriage season. However, in normal times, the demand tends to be price-sensitive. (Prices have started shooting phenomenally since April).

Since there were not many marriages and there were no major festivals (besides Akshaya Tritiya on May 16) during the period, there was no significant demand on account of spiralling prices, he added.

In addition to jewellery demand, which accounts for around 75% of the total demand, a portion of the demand could be attributed to portfolio diversification. This is reflected in rising investments in gold exchange-traded funds (ETFs).

(Assets under management in Gold ETFs stood at Rs 1,800 crore as on May 10 against Rs 850 crore in May 2009).

Given India’s demand-supply dynamics, rising gold demand resulted in higher imports during the first quarter at 90 tonnes v/s 22.5 tonnes during the same period last year.

Source : The Economic Times