Find Out: 3 factors that may cushion slide in gold prices

By Naveen Mathur, Associate Director- Commodities & Currencies, Angel Broking

In the Union Budget 2012-13, government focussed on all important areas of the economy, in order to bring in holistic growth. While the focus has shifted from reducing inflation to mainly curbing the current account deficit, other areas like power sector, aviation, agriculture, infrastructure, education, equity investments were also given equal weightage.

In the commodities space, major focus by the government was seen on the precious metals front with the increase in customs duty on gold imports, this being a negative move for physical gold demand. But in case of silver, branded jewelry was exempted from excise duty, thus providing a relief to silver retailers. The move to increase custom duty on gold imports from 2 percent to 4 percent would help to contain the current account deficit which has ballooned over the past few years. Due to this, we expect traditional and physical jewelry demand to witness slowdown and therefore physical demand for gold could take a hit. The impact of downside pressure in demand could be seen on prices trending lower in the near-term but from a longer term perspective the impact of this on prices is expected to be subdued.

Indian Jewellers and traders called upon an indefinite strike since 17th March to protest against the rise in import duty on gold and 1 percent excise duty on unbranded gold jewellery. In the last week of March, Finance Minister Pranab Mukherjee agreed to reconsider  demand to remove the excise duty on unbranded gold jewelers and come out with an adequate solution, but at the same time he also stated that there will be no reduction in the import duty on gold.   India which is the world's largest importer and consumer of the precious metals, have imported 969 tonnes of gold in 2011. The protests have affected gold imports and shipments in the first quarter 2012 are expected to decline around 56 percent to 125-150 tonnes as compared to 283 tonnes in the same period a year ago. However, if the strike continues then this will hit hard on gold imports in the next quarter too which in turn will have negative impact on gold prices.

In the past few quarters, a shift in demand patterns in case of gold has been witnessed from jewelry to investments in form of ETFs. Despite increase in duty on gold bars and coins, we expect the long term impact of this on prices to be subdued. Continuing high crude oil prices, fiscal deficit leading to higher inflation and Rupee depreciation, shall support investment demand. On back of these factors, sharp downside in gold prices will be cushioned. 

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