Investment in Gold sees high demand in India despite a dip in the physical demand for Gold

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After a wonderful performance in 2019, gold prices have moved sharply higher this year. Year to date, gold prices in India are up about 20 percent, following a 25 percent upward movement last year.

Tension regarding deeper global recession amid the COVID-19 crisis, unprecedented global stimulus, rupee’s depreciation in value against the US dollar, and US-China tensions have led to a high rise in domestic prices. On Friday, gold futures on Multi Commodity Exchange (MCX) settled marginally lower at ₹47,355 per 10 gram while silver collapsed ₹900 to ₹47,741 per kg. Gold had hit a record high of about ₹48,000 per 10 gram in India last month.

Due to high prices, lockdown restrictions, and COVID-19 crisis the gold demand in India has come down, which made dealers to offer discounts official domestic prices. 12.5% import tax and 3% GST is included in gold prices of India. Reuters reported that Indian dealers are offering discounts up to $20 an ounce over official domestic prices. Analysts say that weak consumer demand may limit significant upside while safe-haven demand may support gold on the downside. Kotak Securities in a recent note said that weighing on gold prices are concerns about consumer demand amid bleak economic outlook. Gold may continue to benefit from safe-haven buying as risk sentiment among investors and customers has been dampened by the current economic situation caused by COVID-19. Investors now seem to be more concerned regarding the safety of their investments and are not ready to take many risks.

One needs to wait for a corrective dip to create fresh long positions. The strengthening US dollar makes gold more expensive for holders of other currencies, thus hurting demand. Spot gold prices globally rose over 2% this week to about $1,730.19 per ounce. Due to the lockdown, the physical demand for gold ornaments by customers of jewelry stores has come down but investment demand for gold in India remains strong. Gold exchange-traded funds (Gold ETF) saw net inflows of ₹815 crores in May as investors preferred safe haven options amid high risks in the stock market and the coronavirus crisis, which is higher than the net ₹731 crores infused in April.

Looking into the global investor’s demand for gold, the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, rose 0.5% to 1,135.05 tonnes on Thursday, which is the highest in over seven years. In India, investors are also interested in sovereign gold bonds. The May issue regarding gold bonds helped the government mobilize ₹1,168 crores, the highest amount ever received for a single tranche of gold bonds.

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