Indian Gold Demand Declining

Following improvements in US unemployment data, both gold and silver prices faced sales pressure. Should the US labour market continue to show signs of recovery, this may reduce the likelihood of the Federal Reserve engaging in more quantitative easing.

According to America's Bureau of Labor Statistics, official unemployment figures have dropped to 8.3% – the lowest rate since February 2009. Due to this development, by the end of last week both gold and silver prices came under selling pressure, with traders looking to buy back into equities and more people doubting the likelihood of further QE from Bernanke and the Fed. Nevertheless, critics argue that the official US unemployment rate is only dropping because an increasing number of long-term unemployed are not being factored into these statistics.

The downward trend in the Indian precious metals sector continued on Saturday with a significant drop in national gold and silver prices. While gold fell by 600 rupees down to 28,040 rupees per 10 grams, silver lost 1,590 rupees and was trading at 55,650 rupees per kilo. The increase of gold import taxes announced by the Indian government is probably also weighing on precious metals prices. A survey of Indian banks and financial services agencies performed by the news agency Reuters shows that a majority of these market participants are expecting gold imports in Q1 to drop by 25% in comparison to the same period last year. Thus, during Q1 Indian gold imports might drop from 286 to 220 tonnes. According to the survey, Indian gold sales have lost momentum since the conclusion of the Diwali festival of light last autumn.

The plunge in the Indian rupee that was coupled with significant losses at the Indian stock exchange has also played an important role in this development. The correction phase affecting the stock markets since early summer of 2011 has caused great losses in paper assets, thus making Indians feel less wealthy, and thus less likely to buy gold and silver jewellery or ornaments. According to the World Gold Council (WGC), during the first nine months of 2011, India's gold imports increased by 21% to 753 tonnes in comparison with the previous year. Nevertheless, estimates assume that during 2011 Indian gold imports might have dropped by 8% to 878 tonnes in comparison with 2010, owing to the steep decline in the rupee in the latter part of the year.