Is Jewelry Demand and Indian Demand Returning - Will it Affect the Gold Price?

By: Julian D. W. Phillips | Fri, May 29, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

While it is clear to all analysts that investment demand is and will be the driving force behind the gold price in the days to come, many feel that both the jewelry demand and the demand for imported gold into India has declined for the foreseeable future because of the current high price for gold. But April and May have seen demand from these two areas start to pick up. Will this returning demand persist as the gold price rises?

We feel that it would be a mistake to write off jewelry demand and Indian demand because of high $ prices. Here are our reasons for believing so: -

Developed World demand for 'Gold' Jewelry.

In the West all investors place profits in the center of their investment screens. To date, investments are all about building wealth, so that as one bumps into old age one will have enough to carry one through the remaining years when faculties wane and are insufficient to provide for the future. Gold has not been part of that picture since the early eighties, until the last three years on the Pension front. Even now, as an investment, it is treated with caution, but that is changing.

Cheap Jewelry?

Another Western perception is that gold in jewelry is used only to enhance the beauty of a piece, complimenting diamonds or other stones it supports. At the cheaper end of the market a gold appearance is enough. It's 'cheap gold'. At this end of the market the gold content of a piece of jewelry is miniscule, likely only 'rolled gold' alloy covered in a fine layer of gold] or 9-carat jewelry [note that this is a 9/24th of pure gold]. Better pieces rise to 18 carat [or 75% gold and the balance some alloy]. A pure gold piece tends to be shunned because it is too soft for jewelry and over time, wears away. At least this is the story put forward.

So as the price of gold rises, it becomes too expensive for poorer folk to buy. With jewelers having made a living out of this end of the market, all attempts have been made to keep prices down by lowering the gold content further and perhaps switching to other metals where saleable. As disposable income fell in the developed world in the last two years, so did the demand for cheaper gold jewelry. It was one of the first items to be chopped from the budget when this happened. So we have to ask, "is this the end of that type of market with prices attacking $1,000 again?"

We believe not! And there are two reasons for that belief.

The first is that we do believe that there will be a dramatic recovery in the developed world's economy, increasing disposable income quickly. This of itself will bring back the demand for gold jewelry. It is before a new car on a rising budget.

A second reason is that gold will be recognized as a statement of wealth in inflationary times. Gold was sidelined for a full generation, but, as the price of gold rises to new heights, we believe it again will come to be seen as a statement of wealth in jewelry. Why can we be so sure, you may well ask? A look back over the last few thousand years shows us that the inherent quality of gold makes it the most desired of metals. Keen to show elegance and wealth savvy lassies will want to be decorated with gold pieces as in the past. So the recovery of the gold jewelry market in the developed world should come alongside the economic recovery that is just beginning. But this time round, gold jewelry will be treated with great respect, as inflation takes off.

Will Indian demand for gold recover?

The Indian gold price has dropped back from Rs.15,000 to Rs.13,870.72 and is currently Rs.14,810 for 10 grams. Is now the time to buy and make a profit in gold, in India? Wrong question!

Gold as part of the Fabric of Life

Gold to an Indian investor is not simply a good investment. Indian investors just don't think of gold in the way a Western investor would think. The concept of 9-carat gold piece of jewelry would be considered almost fraudulent to them. Gold should be pure and should have its value measurable by weight alone. To Indians gold is real money. It represents financial security, a future for their families. It is an escape from oppressive government officials in a country where government officials are renowned for their corruption and heavy-handed ways. To be transparent in business with the banks handling their funds is foolishness to them. They deal in cash and avoid any exposure that makes them vulnerable. It is their culture and one that has served them well so far. Even Indians living in different countries continue with these practices. With gold having risen since the turn of the century there is little to contradict their trust in gold.

Add to that their Hindu beliefs and you have, in gold, part of the very fabric of their lives. The last Hindu festival on May 29th was one where they believed that anything bought on that day would appreciate in value. Gold is wealth, with religious connotations that will keep them buying gold so long as their culture persists.

Long-term Investors

Indian gold investors are gold holders for the long haul, so they will buy as long as they have disposable funds available. But they need to know where the 'floor' price of gold at any time is, so that when they buy it doesn't fall straight after buying. They have no exit price as such. Yes, if they believe it has risen too far and is likely to fall, they will then sell some of their gold, but with a view to buying it back once the 'floor' price has been re-established. It is all a matter of price. That's why there's been such a large volume of scrap gold. Once this is exhausted they will turn back to the buy side of the market. The gold price holding or falling will discourage scrap selling. Once this has happened market supplies will drop quickly. Should investment buying and central bank buying continue, we must ask, "will there be sufficient supply or must the price rise again to bring more out of the cupboard". Gold mines can't ramp up supplies quickly, so scrap is the only source easily and quickly available.

Rupee Price for Gold.

How much will they buy, as much gold as their available cash will buy. So the higher the price the less gold they will buy. But their concept of a gold price is a Rupee price, not a U.S. $ one, so when the Rupee depreciated it was seen as the gold price rising. The gold price in the U.S. $ was rising too, and saw the Rupee price move from under Rs.10,000 for 10 grams to over Rs.15,000 for the same amount. That had Indian investors reaching for their old gold jewelry and selling it. Please note that the Rupee has appreciated almost 10% against the U.S.$ in the last month, that takes care of $90 of the recent appreciation.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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