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Will Physical Gold Demand Be Deciding Factor for Gold in H2 2018?

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Indian gold demand

The demand for gold in India (INDA) was lukewarm in the first half of the year, mainly due to stronger equity markets and higher gold prices measured in rupees. The decline during the first half was 6.0%. The rupee has depreciated by ~7.0% year-to-date against the US dollar (USDU). This event caused local gold prices to rise, even with the price decline measured in US dollars.

Second-half outlook strong

The outlook for the second half, however, looks bright. According to the latest Assocham-World Gold Council (or WGC) report, the gold demand in India is likely to surge 25% in the second half due to the improved purchasing power of farmers. The government of India announced higher minimum support prices for crops, which would mean higher income for farmers. The second half is also usually better in terms of demand in India, as the harvest and wedding season provide support.

Demand from China and Iran is strong

While currency depreciation curbed the demand for gold in India, the demand for gold thrived in China (FXI) and Iran on these same concerns. Consumers in these countries are trying to hedge against geopolitical tensions by holding gold. According to the WGC, Iran’s gold bar and coin sales tripled in the second quarter to 15.2 tons, the highest in four years. As the US (SPY) (IVV) imposed sanctions on the country, its currency slumped and investors found refuge in gold. After the US-China trade concerns escalated, the yuan weakened considerably. This trend prompted the flight to safety among Chinese consumers, which has benefitted gold.

Rising inflation (TIP), trade war impacts, and an inverted yield curve (BND) could support gold prices (GLD) in the second half of the year.

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