Price volatility, not prices, deter gold purchases

India, the world’s largest gold market, is  highly vulnerable to price volatility of gold that influences buying decisions, apart from the twin benefits of liquidity and hedge against inflation, rendering import duty ineffective as a tool to control consumption.

The CEO of Bangalore-based Abaran Jewellers, Pratap Kamath, told Deccan Herald, “The jewellery industry is sensitive to price volatility, not high prices as such. When gold price (24 carat) was about Rs 3,000 per gm about three months ago, jewellery volume sales were equivalent to volumes when the price was about Rs 900 about three years ago. But the minute there was a dip in prices (mirroring global trends), sales came down in anticipation of further drop.”

He added that the key to controlling gold imports is to reduce gold bullion bought for the purpose of resale rather than gold bought for making jewellery.

The long-term key to dissuade customers from buying gold and bring out idle gold lying with them is to instill confidence in them. “Normally, none of the households wants to let go off gold, given its liquidity value and hedge against inflation. They need to be assured of reasonable returns and safety to part with gold,” Pratap said.

The final report of the RBI’s working group to study issues related to gold imports and gold loan NBFCs, released on February 6 only affirmed Indians’ faith in gold, saying, "All in all, gold will continue to allure the Indian population in near and medium terms.” It also reflected on the absence of a comparable savings option to gold. “There appears to be no close substitute to wean away investors’ attention from gold in terms of returns, liquidity and ease of undertaking operations.”

Meanwhile, gold imports in February this year are estimated to be substantially less, because of the 30 per cent rise in imports in January, ahead of an impending hike in import duty hike and anticipated changes in the Budget.

The Chairman of All India Gems and Jewellery Federation (GJF), Bachhraj Bamalwa, said, “In January 2013, imports stood at about 100 tonnes compared to about 70 tonnes in January 2012. The quantity was also much higher than average monthly imports of 75 tonnes.” Monthly gold sales in Bangalore on an average is about 3 tonnes in Bangalore.