Indian gold demand to climb in 2016 as buyers seek safe haven

Gold prices rose steadily to the highest in 8.5 months on Thursday as investors bet that the Federal Reserve could find it hard to hike U.S. interest rates this year, while safe-haven demand amid a tumble in equities and the dollar also boosted the metal.

The Fed is unlikely to reverse its plan to raise interest rates further this year, but tighter credit markets, volatile financial markets, and uncertainty over Chinese economic growth have raised risks to the U.S. economy, Federal Reserve Chair Janet Yellen said on Wednesday.

India’s gold demand is likely to rise this year as investors have factored in interest rate hikes by the US Federal Reserve, while the turmoil in stock markets is making the metal attractive, the World Gold Council (WGC) said on Thursday.

Stronger demand from the world’s second-biggest gold consumer could support the global bullion price, which is trading near its highest in 8-1/2 months.

“Overall demand is seen promising since rate hike uncertainty is behind us,” Somasundaram PR, managing director of the WGC’s Indian operations, told Reuters.

Jewelry is the biggest source of demand for gold globally and a slight dip in such demand meant overall demand for gold was virtually flat in 2015 at 4,212 tons.

Central banks have been buying gold to diversify their reserves away from the US dollar and their purchases edged up to 588.4 tons last year, second only to a record high 625.5 tons in 2013, the report showed.

Alistair Hewitt, WGC’s head of market intelligence, was optimistic about the outlook for gold demand given a rally in gold prices since the start of 2016 as investors sought a safe haven from stock market turmoil and warnings of a possible global recession.

Investment demand for gold is improving and flows into exchange-traded funds turned positive this year.

 

“Looking ahead, physical demand will continue to be supported by strong central bank purchases, and continued buying of jewelry, bars and coins by households across the world, led by India and China,” said Hewitt.

“There are strong tailwinds for demand in India. What is happening in the stock market is good for gold demand,” Somasundaram said.

Indian gold prices have risen 15% so far in 2016, while India’s broader Nifty has dropped nearly 10%. In 2015, Indian demand rose 2% from a year before to 848.9 tonnes, WGC data released on Thursday indicated.

India’s jewelry demand in 2015 was the highest since 2010 and the third highest year on record, but the outlook was cautious, WGC said.

“There are reasons to adopt a cautious outlook as we head into 2016: rural incomes continue to feel the squeeze from rising inflation and weather-related crop damage,” the report said.

Somasundaram said gold smuggling in the country is likely to fall “significantly” in 2016, after dropping by 75 tons last year to 100 tons.

Indian jewelry demand reached its third highest level on record in 2015 at 654.3 tons. Global supply of gold fell 4% last year to 4,258 tons, partly because of slower mine production. Mining companies have scaled back since 2013 in a bid to slash costs and mine production shrank in the fourth quarter of 2015, the first quarterly contraction since 2008.