Gold Watch – Upcoming auspicious season

by: Georgette Boele

Gold-Watch - 2 September 2014 - Upcoming-auspicious-season.pdf ()
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Gold’s important role in the Indian society

In 2013, India accounted for around 24% of the world’s gold consumption demand, which includes jewellery and investment demand. Gold is deeply entrenched in the Indian society. It is seen as a symbol of purity, prosperity and good fortune. In this Gold Watch we investigate the possible impact of the upcoming festivals and wedding season on the gold price.

Gold import restrictions likely to remain in place

India has in place a gold import duty of 10% and a 80-20 import-export scheme. The measures were taken to improve the trade and current account balance as gold imports (next to oil imports) are the key drivers of the large deficits. Since these rules have been in place, the trade and current account balances have improved substantially as gold imports fell off a cliff in 2013. In addition, sentiment towards India has improved. There were high expectations that the new government would propose changes to the gold import regime in its budget ahead of the festival and wedding season. This, however, did not materialise. Going forward we expect the gold import rules to remain in place in the coming year .

Local market appears tight ahead of the festival and wedding season…

Indian gold demand has picked up this year. However, with the gold import restrictions in place we judge that it is unlikely that imports will rise sharply to approach last year’s levels. The recovery and stabilisation of the Indian rupee also had a positive impact on demand. There have been reports of tightness in the local market ahead of the festival and wedding season.

…but unlikely to spill over to the global market

Despite this local tightness, the global market does not appear to be tight. In the coming months investors will exit long gold positions again in our view, because the prospect of strong global growth, low inflation, positive sentiment and higher US rates are unfavourable for gold. As a result, gold prices should move lower despite somewhat stronger Indian demand. However, the latter will likely dampen the downside in prices somewhat.

Introduction

In 2013, India accounted for around 24% of the world’s gold consumption demand, which includes jewellery and investment demand. Gold is deeply entrenched in the Indian society. It is seen as a symbol of purity, prosperity and good fortune. In this Gold Watch we investigate the possible impact of the upcoming festivals and wedding season on the gold price.

 

Most auspicious days in Hindu calendar

Important auspicious days in the Hindu calendar for which gold and gold jewellery is bought and worn are Vijaya Dashami on 3 October (this festival marks the end of one’s evilness, bringing faith, prosperity and good times in a person’s life), Diwali on 23 October and Gudi Pavda or the New Year’s day of the Hindu calendar on 21 March 2015.

Wedding season

In India, gold is given at weddings to act as insurance against hard times, or the dowry that is given to the family of the groom. Indians perform rituals of marriage based on auspicious marriage dates and timing known as Shubh Vivah Muhurat. In general the wedding season falls in October-December and January-March. This year the season starts of at the end of November and continues in Q1 2015.

Gold imports

India has in place a gold import duty of 10% and an 80-20 import-export scheme (see box 1 below). The measures were taken to improve the trade and current account balances as gold imports (next to oil imports) are the main sources for the large deficits. Since these rules have been in place, the trade and current account balances have improved substantially as gold imports fell off a cliff in 2013 (see graph below). In addition, sentiment towards India has improved.

 

There were high expectations that the new government in its budget would propose changes to the gold import regime. For example, most expected a reduction in the gold import duty and some even hoped that the Reserve Bank of India (RBI) would abandon the 80-20 import-export rule. Therefore, the jewellery industry was very disappointed when these modifications were not announced. However, there was a change in another segment of the market. On 7 July, the Reserve Bank of India decided that credit given by a foreign supplier to its Indian customer/buyer without any letter of credit/letter of undertaking/fixed deposit from any Indian financial institution for the import of rough, cut and polished diamonds may be permitted for a period not exceeding 180 days. This move was welcomed by the industry.

Going forward we expect the gold import rules to remain in place for the coming year. For starters, the Indian government would like to further improve the trade and current account balances. Moreover, the anticipation of the Fed tightening cycle in 2015 could put downward pressure on emerging market currencies. Despite the improvements in the Indian economy and sentiment towards Indian assets, the Indian rupee could feel the brunt again when US interest rates rise. Therefore, the government will remain quite cautious in changing the gold import regime in the near term in our view (see our India Watch released on 1 September).

 

Monsoon and INR impact

The Indian monsoon has delivered below average rainfall so far this year. This has depressed income for farmers. However, the monsoon was not as weak as previously anticipated. Therefore, the money available to buy gold for the upcoming auspicious season and weddings is higher than expected some months ago. As the above graph shows, Indian gold demand has picked up this year. However, with the gold import restrictions in place we judge that it is unlikely that imports will rise sharply to approach last year’s levels. The recovery and stabilisation of the Indian rupee also had a positive impact on demand. However, we expect some weakening going forward. The impact of a lower INR will likely be muted though as we also expect gold prices to fall. There are reports of tightness in the Indian gold market resulting in higher local premiums. Despite this local tightness, the global market does not appear to be tight. In the coming months investors will exit long gold positions again in our view, because the prospect of strong global growth, low inflation, positive sentiment and higher US rates are unfavourable for gold. As a result, gold prices should move lower despite somewhat stronger Indian demand. However, the latter will likely dampen the downside in prices somewhat.