The Physical Demand for Gold Is Weak, Is the Outlook Bright?
Excise duty on gold in India
When the yearly budget came out in India (EPA) (INDA) on February 29, 2016, the government announced it would levy a 1% tax on the jewelry produced and sold in the country. Gold manufacturers and sellers were outraged and went on strike. After three weeks, the strike has been called off in some parts of the country, while in others, it’s ongoing.
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Gold demand outlook bleak
India’s gold imports reached a two-year low in February as jewelers were expecting the government to cut the import duties further in the annual budget. India’s government has been trying to restrict gold imports to improve its current account deficit. India’s gold demand has been weak in the past two months and the imposition of duties could further weigh on the demand prospects. This could be a negative for gold, as India is the largest market for gold after China and possible changes in the demand from India could potentially affect gold prices. The changes in gold prices are quickly represented in funds such as the SPDR Gold Shares ETF (GLD) and the iShares Gold Trust ETF (IAU). These vital gold-based funds have followed the rise in gold prices and increased by 18.4% and 18.6%, respectively.
Physical demand waning in China
The demand for physical gold in China (YINN) has also been waning for the past few months. Usually, Chinese gold buyers are very price sensitive and rising prices result in falling demand. The yuan devaluation is another reason for weak demand. As the home currency for investors in China gets weaker, gold becomes more expensive for them because gold and other precious metals are priced in US dollars (USDU).
The devaluation of the yuan could actually work both ways for the gold demand. On one hand, it makes the dollar-denominated gold expensive, but on the other hand, as yuan devalues, people start looking for alternative investments to park their money in safely. Gold easily qualifies as one of those other investments. Any further deterioration in China’s prospects could push some investors towards gold. This would be positive for gold miners such as Sibanye Gold (SBGL), Primero Mining (PPP), and Alacer Gold (ASR).
Gold ETFs are another vehicle for channeling investments in gold. To get an idea of the market sentiment towards gold, we’ll look at the recent action in gold ETF holdings and money managers’ positions.