Photographer: Dhiraj Singh/Bloomberg

Gold Demand in India May Only Return to Normal Levels in 2018

  • World Gold Council sees average use at 850-950 tons by 2020
  • More uncertainty seen in 2017 by proposed goods tax: WGC

Gold consumption in India won’t return to normal levels until 2018, delaying a forecast recovery from a seven-year low, as a liquidity squeeze tightens spending this year in the world’s largest consumer after China, according to the World Gold Council.

This year “has a lot of uncertainties,” P.R. Somasundaram, managing director for the council in India, said by phone from Mumbai. The government’s move to ban high denomination currency is keeping demand muted, while further uncertainty is expected from a proposed uniform goods and services tax and a plan to standardize the quality of jewelry, he said.

While the cash crunch is seen taking a toll on demand in the short term, India’s usage is expected to average between 850 metric tons to 950 tons by 2020, the producer-funded group estimates in a report Tuesday. The WGC trimmed its consumption estimate for 2016 twice last year to between 650 tons and 750 tons. Those would be the weakest figures for India since the 578.5 tons consumed in 2009.

The council’s previous forecast on Nov. 8 for a recovery in demand in 2017 coincided with Prime Minister Narendra Modi’s announcement to scrap notes of 500 rupees and 1,000 rupees to weed out unaccounted money and bring more transparency into the financial system. Demand in 2015 was 858.1 tons, according to council data.

“Any tightening in gold-related policies, such as the measures that have recently been implemented to regulate and formalize the gold industry, are disruptive and will stifle demand in the short to medium term,” the council said in the report titled ‘India’s gold market: evolution and innovation.’ However, rising incomes and steady saving rates should support investment across a range of assets, including gold, it said.

The currency ban would also hit gold recycling, which is highly cash-led, reducing supply to local refiners, that are already under stress, Somasundaram said. The refining industry would enter a period of consolidation even as imports of gold ore slow after surging in the last few years, he said.