Special Report: Summer of discomfort for gold trade

It has been a summer of discomfort for the gold jewellery trade, with overall business shrinking by about 12 per cent compared with the previous year.

As higher prices and regional uncertainties weighed on the metal, jewellery purchases throughout the region suffered a setback during the second quarter of the year.

Gold jewellery offtake in the high profile market of Dubai and the rest of the UAE also fell by the same margin as prices held significantly above the psychologically important level of $300 for the better part of the period.

According to World Gold Council figures, the overall demand in the UAE fell by as much as 3 tonnes to 23.2 tonnes in the second quarter of the year as against 28 tonnes in the first quarter of this year.

Despite a general trend in favour of a pick up in investment gold, activity on this front was also lower, with demand falling from 0.9 tonnes in the first quarter to half-a-tonne in the second.

The Gulf markets, as also those in the Subcontinent, are highly sensitive to price volatility and during such times it is common for both trade and the consumers to hold back buying against cash.

Unavoidable purchases are made, as far as possible, by trading in old jewellery in exchange for new, which does not add to the demand in real terms. Demand for new gold returns only after the consumers feel more assured that the prices have stabilised.

According to WGC, a sharp downturn in Egyptian gold consumption due to a 40 per cent domestic price increase saw the Arab country sending a lot of scrap gold to the regional markets for recycling.

This also affected the flow of new gold into the region. Egyptian gold prices in local currency went up steeply on the basis of the official exchange rates for the dollar and this coupled with difficult economic conditions created reluctance among consumers for purchase of the metal in any form.
On the other hand, recycling looked an attractive option as it fetched better prices.

Elsewhere in the Gulf, Saudi Arabia recorded a pick up in jewellery sales during the May-June wedding season, but the high prices and their fluctuations created resistance among consumers and the overall demand was down by 12 per cent for the quarter.

In Kuwait, jewellery demand fell by an even bigger margin while Oman, Qatar and Bahrain all suffered from declines.

In India, a major influence on the regional jewellery business, rising rupee prices and weak economic indicators put paid to the hopes of any major recovery, with the result that official gold imports in June slumped to one of their lowest levels since the Indian government launched liberalisation of gold imports in 1997.

According to WGC, while the wedding season and gold buying occasions hinted at a recovery during short periods of price stability, the year-on-year fall in consumer demand in the second quarter was as high as 41 per cent.

Some estimates said 50 to 60 per cent of all purchases were against exchange of old jewellery, which means that the demand for new import is greatly reduced.

In contrast, demand in Pakistan staged a solid recovery with about 20 per cent increase during the first half year-on-year. This was despite the fact that the rising prices had actually hampered offtake.

There was reported to be good investment buying activity encouraged by political tensions. Under the new Pakistan government policy, bulk importers of gold and silver do not need licence any longer, as opposed to the earlier practice of all imports having been channelled through only three importers.

The most positive picture in the Middle East is from Turkey, where an economic upturn boosted gold demand, both in the form of jewellery and investment, to a year-on-year increase of about 95 per cent.

The first half investment demand for gold was 19 tonnes which was more than double that of the previous year.

The second quarter also saw a fall in the distress sales of the first quarter and, as a result, jewellery offtake touched 20 tonnes, 97 per cent higher than the same quarter of the previous year.