Demonetisation to shave off 350 tonnes of gold demand in 2017

Demonetisation has hampered the potential for an increase in gold demand in 2017. The precious metal was in any case suppressed for the most part of 2016. Analysts fear that domestic gold demand, down by 40-50 per cent, might not increase in the near future. They are, however, keeping their fingers crossed.

Gold imports in 2016 were much lower than the yearly average of 1,000 tonnes of the preceding years. Inward shipments of the metal, which stood at a little over 900 tonnes in 2015, are estimated to be just a tad above 600 tonnes in 2016, even if about 150 tonnes of smuggled gold are considered.

Domestic demand for gold is estimated at 700-750 tonnes. Of this, 300-350 tonnes of gold was bought in cash. Jewellers and bullion dealers were not preparing bills for imported gold sold illegally in the domestic market, and jewellers were accepting cash against the sale of duty-paid gold and splitting the bills to keep them below Rs 2 lakh.

From the consumers' perspective, 300-350 tonnes of gold demand bought with cash remained off the books. This demand has largely evaporated due to demonetisation, as jewellers have become cautious about making sales without bills, after coming under the radar of investigating agencies.

A good monsoon had raised hopes of a good kharif crop that would enable farmers to pay off debt generated due to two bad years, and use a portion of the surplus to buy gold. Even this hope has been belied, as the severe cash crunch resulting from demonetisation prevented farmers from selling their crops and the prices of most Kharif commodities fell sharply. Because of this, there will be very little surplus left for parking in gold.

Now, with their payments being made to their bank accounts, they are less likely to buy gold through this channel, as income the generated from selling gold will not be agriculture income, and will, therefore, be taxable. So this part of demand will also come down drastically.

Consumers who used to buy gold even as a part of portfolio diversification have not seen any returns from the metal during the three years prior to 2016. And this year, the returns are hardly 10 per cent. With the cash crunch likely to prevail for some more time, their gold demand will not revive till they are comfortable and get out of demonetisation shocks. Only marriage-related, bare minimum demand, is likely to continue.

Demonetisation to shave off 350 tonnes of gold demand in 2017