The Hindu Business Line : High prices take toll on bullion demand

A COMBINATION high and volatile international prices and weakening rupee is seen slowing down physical demand for gold ornaments in our country, despite the series of festivals over the past six weeks.

Festival sales have admittedly been muted this season, much to the disappointment, nay discomfiture, of jewellers. Worse, high prices have induced more scrap sales than fresh demand.

Confirming the disappointing demand scenario this season, Mr Bhargava Vaidya, a bullion expert, said the festival season from Navratri to Diwali (October to early November) was the poorest in recent memory for gold jewellery sale.

Commercial banks have pitched in to absorb a part of the demand. Many banks announced sale of gold coins during the festival season. It is highly likely that a part of the demand for gold jewellery got diverted for coins.

High and volatile prices have surely discouraged the average Indian consumer. A host of other investment opportunities are available in addition to demand for consumer durables.

Indeed, currently, gold sales in the country are facing a double jeopardy.

There is demand compression because of both income effect and price effect.

While strong international rates and weak rupee have made imports expensive leading to lower demand, the more fundamental reason is the fall in rural incomes because of an average (some assert, less-than-average) kharif 2005 farm harvest.

It has not been a particularly great southwest monsoon and farm output has generally fallen short of the target and initial expectation. Rural incomes are far from buoyant. On current reckoning, the Rabi (summer harvest) crop harvest due four months from now would also be just about average.

Growth in rural incomes in the last four years has remained very modest because the overall agricultural growth rate itself has averaged around 1.5 per cent a year.

For Indian demand to pick up considerably either prices have to decline to consumer-friendly levels or rural incomes have to rise robustly. In the short run, the latter appears highly unlikely.

With falling crude prices and firming dollar, the prospect of gold declining to around $450 an ounce level cannot be ruled out. Although slightly reduced recently, the speculative length on the Comex is still fairly high. It remains to be seen when long liquidation begins.

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