April trade data reported yesterday was a rude shock to both the Equity
and Currency markets. Given the substantial correction in Gold and Oil
prices over the recent past, markets were expecting a meaningful respite
on the Current Account Deficit. But this was not to be. The culprit –
apart from slowing exports, was a 138% oya surge in gold imports. The
fall in gold prices led to a sharp increase in demand. Anecdotal evidence
suggests that this trend continued over May as well.
The behavioral pattern seen over April-May is not an anomaly. Data
over the last decade suggests that a substantial correction in Gold Prices
has typically led to an increase in demand. Our regression analysis
suggests a meaningful inverse relationship between price and demand.
Consequently we believe investors should temper their optimism on the
impact of the correction in Gold prices both on the CAD and on
financial savings. J.P. Morgan Economists believe that the CAD will
narrow only to about 4.6% of GDP in FY14E from an expected 5.1% of
GDP in FY13E (vs. consensus estimates of 4% for FY14E).
Over the last two years, Gold has been attracting significantly larger
proportion of household savings. Higher inflation and weak growth has
likely influenced this trend. Going forward, revival in economic growth
and improved investor confidence are keys to reversing this trend.
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and Currency markets. Given the substantial correction in Gold and Oil
prices over the recent past, markets were expecting a meaningful respite
on the Current Account Deficit. But this was not to be. The culprit –
apart from slowing exports, was a 138% oya surge in gold imports. The
fall in gold prices led to a sharp increase in demand. Anecdotal evidence
suggests that this trend continued over May as well.
The behavioral pattern seen over April-May is not an anomaly. Data
over the last decade suggests that a substantial correction in Gold Prices
has typically led to an increase in demand. Our regression analysis
suggests a meaningful inverse relationship between price and demand.
Consequently we believe investors should temper their optimism on the
impact of the correction in Gold prices both on the CAD and on
financial savings. J.P. Morgan Economists believe that the CAD will
narrow only to about 4.6% of GDP in FY14E from an expected 5.1% of
GDP in FY13E (vs. consensus estimates of 4% for FY14E).
Over the last two years, Gold has been attracting significantly larger
proportion of household savings. Higher inflation and weak growth has
likely influenced this trend. Going forward, revival in economic growth
and improved investor confidence are keys to reversing this trend.
India’s Gold Obsession - Not Easy to Wish
Away
Gold prices have been volatile in April-May. After plunging 17%, prices have
rebounded by 6%, from the lows.
The correction has sparked hope of a substantial improvement in both the Current
Account Deficit (CAD) and in the financial savings rate. Recall that over the last few
years, sustained high inflation has made Gold a preferred investment option with
imports surging as a result.
The sharp correction if sustained should provide some relief to the stressed CAD.
But we believe investors should temper their optimism on the impact of this
correction on the stressed macro.
The fall in gold prices has led to a sharp increase in demand over the last month.
Monthly trade data indicate that gold imports surged 138% oya over April.
Anecdotal evidence suggests that the trend continues over May as well. The timing
of price correction has also been opportune as the wedding season commences next
month.
Seasonal factors aside, it is important to note that over the past a correction in Gold
prices has typically led to a meaningful pick up in demand.
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