India Demand Should Support Gold's Future

While gold prices are expected to fall in the short term, demographic factors in Asia should help prop up long-term demand

Morningstar Equity Analysts 1 September, 2017 | 8:58AM

Indian women buying gold jewelleryIn 2016, global jewellery demand, which is a key to the fortunes of the gold price, fell more than 20% to levels last seen during the financial crisis. Higher prices were partly a cause, as the average US-dollar-denominated gold price in 2016 was about 8% higher than in 2015, and higher still in key currencies like the Chinese yuan and Indian rupee, both of which fell against the dollar in 2016. 

While higher prices clearly weighed on jewellery demand, this was not the primary cause. Gold price increases in prior years did not lead to as substantial a decline. For example, when the average gold price rose about 6.5% in 2012, jewellery demand fell only about 1.5%. In addition, when overall prices were $100 to $500 an ounce higher from 2011 to 2014, jewellery demand was still higher than it was in 2016.

The fact that nearly all of 2016's sharp drop in jewellery demand was attributable to China and India suggests country-specific factors were largely to blame. Year over year, official Chinese gold jewellery demand fell 17% and Indian purchases fell 31%.

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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