Gold has been a favourite asset class for the people in India for ages. Hence, the fluctuation in gold prices had always been a concern for many. Huge import of the yellow metal is a growing concern for the government because it widens the country’s current account deficit (CAD), which is bad for the economy, but had little impact on people’s penchant for this metal. According to an estimate, a middle-class household in the country possess gold ornaments worth at least Rs 1 lakh.
Though the year 2015 was bad for yellow metal, analysts and players in the field point out that 2016 will be a stable year for the trade as prices are unlikely to see undue fluctuations. One interesting fact is that new generation customers are not fascinated towards gold and an inclination to diamond jewellery is happening in a big way. But there are people who believe that gold price may fall this year due to decrease in demand.
“Out of the total jewellery demand, diamonds account for about 15 per cent in value terms. On an annual basis the turnover of diamond jewellery keep on increasing. In 2016, gold price will be almost stable. But the hard fact is that going forward the sale of gold is likely to decrease. This is mainly because the younger generation is not interested in buying gold in huge quantities. They do not have much of a saving mentality. This will hurt small players in the field and will result in decreased gold demand in India,” said Joy Alukkas, Chairman, Joy Alukkas Group.
“The average return given by gold for the past 25 years is only 6-7 per cent. Since 2008, prices of many commodities have fallen. It is due to the meltdown of financial markets. But the scenario has changed as stock markets are witnessing a revival. The high price of gold is not sustainable for long. Also the youngsters below 35 years are not buying gold in huge quantities,” said G Sanjeev Kumar, founder, Prognoadvisor.com, an online financial planning firm.
According to Somasundaram, Managing Director, India, World Gold Council, 2016 certainly appears positive for gold, as uncertainty has receded on global factors like the US Federal rates, and enhanced savings following higher economic growth and fall in inflation will lift demand for gold.
“The year also starts with a stronger inherent optimism of the average consumer, after an unusual combination of events like unseasonal rains in Q1, poor monsoon in Q3 and floods in some key markets in Q4 affected sentiment in 2015,” he added.
V P Nandakumar, chairman, Manappuram Group said that the gold price scenario is different in India and globally. “There are many factors which affect the price of gold globally. Currently, only the dollar is strong and all other commodities and currencies are weak. The same situations will continue in 2016 as well. Worldwide the price of yellow metal may fall. But in India I don’t see such a scenario as the demand will drive growth here. Here the prices will be more or less stable in this year,” he pointed out.
Demand Outlook +ve: WGC
According to the World Gold Council (WGC), the year 2015 was not good for gold. By the end of the year, gold’s dollar price was down by more than 11%. Investor sentiment was bearish: average net-longs reached their lowest level since 2003 and gold-backed ETFs saw outflows of 100 tonnes for the year. Better economic performance in the US allowed the Fed Reserve to raise its rate on December 16, 2015 for the first time in 9.5 years. The Fed expects to increase rates by 1 per cent by the end of 2016. Despite this, the outlook for gold demand in 2016 remains bright. Market consensus is more dovish and expects the Fed Funds rate to be below 1% by the end of 2016. Either way, rates may remain low for some time. Interest rates are not a dominant driver of the gold price once the effect of the dollar is taken into account.