Why Gold Jewelry Demand Will Recover This Year


The jewelry demand for gold, which is the largest component of the overall demand for the commodity, witnessed a considerable decline in 2016. As per the World Gold Council’s Gold Demand Trends report for the year 2016, the jewelry demand for gold declined roughly 15% year-over-year to 2,042 metric tons in 2016. [1] Most of the dip in the jewelry demand was due to a fall in demand in China and India, the world’s two largest consumers of the metal. In this article, we will look at the reasons for this decline and the trajectory of the jewelry demand going forward.

High Gold Prices

Gold is closely associated with several social customs in both China and India, with festivals and marriages driving the demand for gold jewelry in these countries. In addition, fast-rising incomes have increased the capacity for discretionary expenditure such as the purchase of gold jewelry in these countries in recent years. However, sharp increases in gold prices usually discourage spending on gold jewelry. Gold prices averaged roughly 8% higher year-over-year in 2016 as the uncertainty created by the unexpected outcome of the UK’s EU referendum sharply drove up prices in the months following the referendum. [2] The increase in gold prices depressed gold jewelry demand in both China and India. In addition, there were additional reasons for the decline in gold jewelry demand, specific to each country.

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Chinese Jewelry Demand

Besides higher gold prices, changing consumer preferences impacted jewelry demand in China, the world’s largest consumer of gold jewelry. Changing preferences among younger Chinese consumers have shifted discretionary spending towards experiences such as travel at the expense of purchases of gold jewelry, which was accentuated by elevated prices in 2016. [1] In addition, the tightening of capital controls by the Chinese government negatively impacted gold imports into China last year, constraining gold supply and the sale of gold jewelry. [1] As a result of these developments, Chinese gold jewelry demand fell nearly 15% in 2016 to 629 metric tons. [1]

Indian Jewelry Demand

Besides higher gold prices, Indian jewelry demand in 2016 was adversely impacted by regulatory changes impacting gold purchases as well as the government’s clampdown on citizens’ black money. The Indian government introduced regulatory changes in Q1 requiring purchases of gold jewelry above a certain amount to be linked to citizens’ PAN cards. [3] By making these transactions traceable, the government aimed at curbing black market gold transactions. The decline in demand as a result of this move and a jewelers’ strike in response to this change in regulation drove down gold jewelry purchases. Furthermore, the demonetization of high denomination currency notes towards the end of the year, aimed at discouraging illegal black money transactions in the economy, created a cash crunch that impacted legitimate gold purchases. As a cumulative impact of these measures, legitimate gold purchases fell nearly 22% to 514 metric tons in 2016. [1]

Improved Demand Conditions in 2017

As a result of strengthening economic conditions in the U.S. and additional rate hikes by the Fed expected this year, we are likely to witness a decline in the investment demand for gold in 2017, which should translate into lower prices, as illustrated by our forecast shown below.

The decline in gold prices should boost gold jewelry demand globally, including in both India and China. In addition, the easing of the cash crunch in India in the wake of the demonetization of last year, should see pent-up demand translate into higher gold jewelry purchases in 2017. An 82% year-over-year surge in Indian gold imports in February corroborates this notion. [4] Further, whereas changing consumer preferences and slowing economic growth are likely to negatively impact Chinese jewelry demand in the longer term, lower prices should see a recovery in demand from last year’s levels in 2017. Thus, in contrast to the dip in gold jewelry demand seen in 2016, this year is likely to witness a recovery. However, the decline in investment demand is likely to be more significant than the increase in jewelry demand, translating into lower gold prices.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:

  1. Gold Demand Trends 2016, World Gold Council [] [] [] [] []
  2. Historical Gold Prices, Kitco []
  3. One lakh jewellers on strike to protest PAN rule on gold purchases, Hindustan Times []
  4. India’s February gold imports surged to 50 tons: GFMS, Economic Times []