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Wednesday, 15 May 2013 06:56
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Other investments need to look up for gold to fall

 

The dramatic 138% year-on-year surge in gold imports in April may well be an aberration as senior government official have said, but it could also lead to further demand-crushing measures like an increase in import duties—on Monday, RBI put fresh curbs on imports and, in January, import duties were hiked from 2% to 6%. For a while this seemed to work, and Q4 FY13 imports of gold were $16.6 billion, up just 6% year-on-year as compared to a 24% year-on-year hike in Q3. Indeed, on a sequential basis, Q4 imports were $1.4 billion less than those in Q3.

So what explains the April surge? After all, when gold prices hit a two-year low last month, it did look like this would have a beneficial impact in terms of lowering gold imports. Since much of the increased demand was an investment-driven one, a fall in gold prices, the logic went, would lower investment demand as well. While some part of the April surge can possibly be explained by the Akshaya Tritiya festival demand, a larger issue that needs focusing on is lack of alternatives for investors. The Rajiv Gandhi Equity Savings Scheme (RGESS) has been a complete failure and investors continue to move out of mutual funds and a sharp reduction in incentives available for insurance has seen a sharp fall in first-year insurance premiums.

So while an increase in import duties on gold, were this to happen, would dampen demand, the ultimate drivers of investment demand are (a) investors fear of a further growth slowdown, especially in the context of political uncertainty and (b) the lack of credible investment alternatives. Unless the government is able to address both issues—sectors regulators like Sebi and Irda, for instance, need to take an urgent re-look at broker commissions—the demand for gold is unlikely to slow down in a hurry.

 
 

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