Fall in US gold prices may not impact demand in India, China: WGC

Mumbai-India (Dec 18)  The World Gold Council expects the hike in US Fed rates and subsequent fall in gold prices in dollar terms may have little impact on demand in major consuming countries such as India and China.

With US hiking Fed rates dollar is expected to strengthen and weaken gold prices in dollar terms. However, the Council in a statement on Friday said while the US dollar price is one driver of gold demand it is not always the most relevant factor for most investors.

Physical demand for gold is truly global as over 90 per cent comes from outside the US, primarily from the Asian economies, particularly China and India. In these countries, it said, local price matters most and the non-US dollar gold price has held up, even inching slightly higher in 2015.

“If there is a temporary downward impact of the price of gold due to a US rate rise then this could well lead to increased demand in price sensitive markets such as India and China,” it said in a statement on Friday.

This is already evident in China with the Shanghai Gold Exchange wanting to have gold traded in yuan and the Indian gold trade expressing intent to establish a gold exchange, it said.

Following the launch of the International Board by the Shanghai Gold Exchange to open up the Chinese gold market to international investors, SGE’s plans to introduce a yuan-denominated gold pricing mechanism to facilitate regional market trading in 2016, said the Council.

“We are likely to see further developments in the key Asian markets with the continuing introduction of the pro-gold schemes and potentially a gold exchange in India,” it added.

A different picture for gold price has emerged in last three years with the US economy beginning to recover and fears of deceleration in emerging markets contributed to a decline in the price.

However, a better economic performance in the US made the Federal Reserve raise rate for the first time in six and a half years, thus pushing up dollar higher and exerting downward pressure on gold prices. The impact of US rate hike on gold prices has largely been factored in as the market was anticipating this increase for almost a year and a half, said the Council.

While there are some concerns on GDP growth across emerging markets, economic output and incomes continue to increase, strengthening the case for gold as a long-term strategic asset and wealth preservation tool next year, said WGC.

Source: TheHindu