>Spotlight on India’s Gold Demand Trends

■ Soaring Prices Impact India’s Gold Demand…— Historically, Indian gold demand has been price inelastic, with the bulk of Indian demand being jewellery. But record-high prices and the global recession, coupled with the drought, have kept away consumers this year. Latest data by the World Gold Council indicate that India’s gold demand stood at 137.6 tonnes in 3Q09, down 49% yoy. Cumulatively, demand in 9M09 was 264 tonnes, vs. 553 tonnes in the same period last year. This could be due to consumers meeting demand by (1) exchanging old items (according to the World Gold Council, exchange activity accounts for 60% of retail turnover in recent quarters), (2) melting down and re-making old pieces, (3) shifting to costume/gold-plated jewellery.

■ …resulting in imports remaining muted — Poor demand has also had a knock on impact on imports, which stood at just 16.5 tonnes in Nov, down 51.5% yoy. This takes cumulative imports to just 173 tonnes in Jan-Nov09, less than half imported during the same period last year (417 tonnes). In addition to a sign of waning demand, the decline has implications for the import bill given that gold accounts for 8% of India’s total imports in value terms. In addition to lower oil, lower gold imports could result in a further narrowing of the trade deficit in FY10.

■ Outlook and Latest Price Forecasts — While the jury is still out on whether the current trend seen in India gold demand is cyclical or structural, an interesting trend is that in contrast to the past, consumers now have a ‘rupee budget’ rather than a ‘weight (grams) budget’. As regards prices, while there are concerns of a bubble, Citi’s commodity strategists believe that (1) continued USD weakness and (2) attempts by govts to weaken currencies will remain the main source of support for gold at US$1,200/oz over 6-12M. The Technical team expects prices to eventually rise over US$2,000/oz.

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