The trigger for international gold prices rising to $3,000 per ounce was Germany’s upcoming heavy government borrowing.
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IMAGE: People buying gold ornaments at a jewellery store. Photograph: ANI Photo
As gold traded at Rs 90,500 to Rs 90,800 per 10 grams in Mumbai’s spot bullion market, tracking international gold prices that hit record highs and crossed $3,000 per ounce on Friday, domestic demand has taken a hit, say industry players.
The jewellery industry is now debating whether demand will return at these high prices as the marriage season has already begun, even as they are simultaneously preparing for changes in demand composition and considering tweaking products.
At the current high prices, gold is increasingly unaffordable for the lower- and middle-income groups, the biggest buyers of gold in volume terms, said Chirag Sheth, principal consultant at London-based bullion research firm Metals Focus.
According to a survey conducted in 2022 by IIM Ahmedabad’s Indian Gold Policy Centre, unlike the general perception that only the rich buy gold, 56 per cent of gold was bought by people earning between Rs 2 lakh and Rs 10 lakh annually.
Since 2022, the price of gold has doubled, but these buyers’ savings have not, reducing their capacity to buy more gold.
The trigger for international gold prices rising to $3,000 per ounce was Germany’s upcoming heavy government borrowing.
One ounce is approximately 28.35 grams.
Traditionally, Germany has been one of the most fiscally responsible governments in the world and has avoided heavy borrowing.
The confrontation between United States (US) President Donald Trump and Ukrainian President Volodymyr Zelenskyy had an unintended consequence.
Germany realised it had to spend heavily on its defence as it could no longer reliably depend on the US.
Nigam Arora, a US-based algorithm analyst and author of the Arora Report, said, “Gold favours government borrowing as it is the antidote to weakening fiat currencies.
“However, in the short term, technically, gold is overbought.
“When gold gets overbought, it tends to pull back.”
The US’s tariff policy, amid fears of increased tariffs on gold and silver, has also resulted in a huge physical stock of precious metals being sent to the US, adding fuel to the fire.
Given these developments, jewellers in the domestic market are preparing to address the high-price scenario.
Surendra Mehta, national secretary of the Indian Bullion and Jewellers Association (IBJA), said, “Marriage-related demand will be there, but a shift towards low-carat and lower-weight jewellery will be seen.”
As of now, jewellery above 14-carat purity is being hallmarked.
“Low-carat jewellery, especially 18-carat, is preferred for diamond-studded jewellery.
“However, Mehta said, “We have proposed to the government to permit hallmarking of 9-carat jewellery.
“While it takes time for low-carat, lower-purity jewellery to gain traction, these are efforts to sustain the business.
“Gold has traditionally remained in demand irrespective of price.
“Only the buyers take time to accept that higher levels are sustaining.”
An industry official, however, added that at the current high prices, there is a huge rush to sell old gold coins, bars, and jewellery in exchange for cash.
This, however, is a usual trend when gold prices rise.
“This time, the volume of sales is very high amid inflationary trends and the need for cash.
“In the March quarter of 2023, old gold encashed for cash was 34.8 tonnes, as per World Gold Council (WGC) data.
“In the March 2024 quarter, it was 38.3 tonnes, and in the ongoing March quarter, it may surpass that figure.
“The exchange of old jewellery for new is also rising and is expected to reach half of total sales very soon,” the official quoted earlier said.
As for the gold price outlook, Arora said, “On the positive side, there are potential triggers that can push gold even higher.
“The positive triggers include new tariffs, a weaker dollar, lower interest rates, and increasing concerns about a potential US recession.
“On the negative side, a ceasefire in Ukraine would be bearish for gold.”
However, Arora added, “The Arora Report’s long-term stance on gold remains bullish.
“Any significant dip will likely be a buying opportunity.”
The US Federal Reserve’s Federal Open Market Committee (FOMC) is meeting on March 18-19, which may indicate further rate cuts.
John Reade, senior market strategist for Europe and Asia at WGC, said, “The recent rally has been driven by uncertainty around US tariffs and the developing trade war, which has amplified economic risks and market volatility, further driving investor interest in gold as a key diversifier.”
“The big question now is whether gold can hold above $3,000.
“Heightened risk and uncertainty will certainly help sentiment, but this will need to be translated into stronger buying from investors, especially Western buyers, or another step-up in central bank purchases,” Reade added.
Feature Presentation: Ashish Narsale/Rediff.com
