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Why gold is not glittering

LiveMint logoLiveMint 21-05-2014 Vivina Vishwanathan

Global gold prices have been declining ever since they peaked in 2011. Over the past two years, demand, too, has tapered. Investment demand got a jolt after a big sell-off in gold exchange traded funds (ETFs) in early 2013. The latest demand trend report from the World Gold Council (WGC), released on Tuesday, shows that globally, for the first quarter of 2014, demand across categories has remained more or less stable at 1,074 tonnes. In India, the story is a little different. Last year, in an attempt to manage the high current account deficit, duty on gold was raised to 10% from 4%. This, along with higher domestic prices, led to a drop in demand. So far this trend hasn’t changed. According to WGC, demand fell to 190.3 tonne, down 26%, in the first quarter of the calendar year 2014 from the first quarter of 2013, mostly due to falling investment demand—down 54% in the first quarter of 2014 compared with the same period last year. Jewellery demand fell 9% year-on-year.

“The Q1 2014 figures illustrate the continued impact of higher import duties and supply curbs,” said P.R. Somasundaram, managing director-India, WGC.

Domestic gold ETF numbers also show a declining trend. Data from the Association of Mutual Funds in India (Amfi) shows that there was a net outflow of `1,816 crore in 2013 from gold ETFs versus a net inflow of `1,826 crore in 2012. The first four months of 2014 has already seen net outflows worth `638 crore.

Demand in India could pick up, said experts, if the import curbs are lifted. “The expectation is also that there will be improvement on the sentiment as well as governance front, which will create a positive environment leading to healthy demand,” said Sunil Jindal, managing director, SRS Ltd, a jewellery retailer.

But there is a bigger picture. At present not only is domestic gold trading at a slight premium but focus, too, has once again shifted to risky assets. This means there could be some more downside.

“Currently, the outlook is bearish. The world economy is improving and people are looking for riskier assets. Rupee appreciation will also play a critical role in bringing down gold prices,” said Naveen Mathur, associate director-commodities and currencies, Angel Broking Ltd.

Rather than waiting for a rally, consider offloading your excess holdings at the current price.Yatish Asthana/Mint

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