Why Has The Jewelry Demand For Gold Declined?
As per the World Gold Council’s Gold Demand Trends report for Q1 2016, released earlier this month, the jewelry demand for gold (which accounts for 55-60% of the overall demand for the metal) declined 19% year-over-year in Q1 2016.
The decline in the jewelry demand for gold was largely a result of lower demand in China and India, the world’s largest consumers of gold jewelry. A surge in gold prices, which have averaged around 4% higher so far this year as compared to the full year 2015, has acted as a deterrent for the consumption of gold jewelry in the price-sensitive Chinese and Indian markets, in addition to country specific reasons outlined below.
The jewelry demand for gold is highly correlated with rising incomes and consequently GDP growth. Slowing Chinese GDP growth has negatively impacted Chinese demand for gold, as indicated by the annualized GDP growth figures mentioned below. In addition, a temporary supply crunch in China during March further dampened gold consumption. A new standard for hallmarking of gold jewelry came into effect earlier on in May, which requires that all gold jewelry of 99% purity be hallmarked as Chuk Kam. Chinese retailers were busy adjusting their inventories during March in order to replace existing stock with inventory that complies with the new requirements, in time for the May deadline, creating a temporary supply shortage, which further weakened Chinese gold consumption.
In India, expectations of a reduction in customs duty on gold made consumers put off purchases of gold jewelry in February. However, the government proposed an increase in both custom and excise duties on gold doré (unprocessed gold ore from mines) from 8% to 8.75% and from 9% to 9.5% respectively in the Union budget released on February 29. Furthermore, it also proposed a 1% tax to be levied on jewelry manufacturing. Strikes across the jewelry industry in India in response to the government’s proposal negatively impacted gold jewelry sales in India in March.
Though gold jewelry demand should recover as the impact of one-off country-specific events in India and China subsides, sluggish Chinese growth would continue to weigh on the jewelry demand for gold in the coming quarters.
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