The World Gold Council recently warned that India, the world’s largest bullion importer, is likely to see a decrease in demand for gold—meaning a fall for the second consecutive year—as consumers reduced spending sharply amidst a slowing economy.
On Monday, gold futures for India fell as the rupee jumped to its highest in more than a week. Spot gold was $1.586.55 per ounce on Monday in Mumbai, a drop of 0.2 percent. It was at a high of $1,921.15 in September 2011.
“Demand is going to be subdued, given the state of the economy and the sentiment,” Ajay Mitra, managing director, Middle East and India at the council, said in a phone interview from Mumbai. “People are preferring to stay invested in cash because of uncertain times. They aren’t very optimistic about the economy and the way the future looks.”
Inflation has been a consistent problem recently in India, shooting above 7 percent for the fifth month this June. An anemic expansion rate of 5.3 percent for the economy, the slowest in nine years, added to market woes.
The monsoon season is also expected to hurt matters, with scarcer-than-average rainfall pushing inflation and costs higher.
This will mean a slow agricultural season for farmers, which isn’t good news since almost 60 percent of gold purchases in India stem from rural areas.
Gold has acted as a safe harbor for investors fleeing the more volatile currencies markets.
Although there are various pressures on the gold market in India, the upcoming lengthy festival season offers reason to have some optimism, as jeweler sales often pick up.
Should prices stabilize somewhat, the upcoming fall months will offer a chance to rally back, but annual volumes are still apt to be at least 30 percent lower thanks to a tax increase that would probably dent demand.