Demand for gold seen buoyant in 2007

Even as the rupee has risen considerably, the demand for gold is expected to remain bullish in 2007.

According to a report by Icra, the factors supporting continued increase in demand for gold (and firm prices) remain largely in place.

Buoyant jewellery fabrication demand, which picked up during the period of lower prices in mid-2004, is likely to be critical in preventing prices from declining.

This is perhaps highlighted by the Indian market which accounts for more than 20 per cent of fabrication and bar hoarding demand, where offtake increased at high rates in 2004 and 2005, despite a significant rise in rupee.

For the year 2007, investment demand for gold is expected to be supported by a number of factors, including individuals purchasing gold as a hedge against a potential rise in global inflation driven by high and volatile world oil prices.

Other factors include ongoing concerns about the large US current account deficit and the potential impact on the US dollar, uncertainty over Iran's nuclear program and the potential implications for global oil prices, and continued speculation about potential gold purchases by central banks.

Another key factor in propelling the rise in prices is the rise in producer dehedging resulting in reduction of mine supplies. While mine production is expected to rise, official sector sales are expected to decline as central banks that are not signatories to the Central Bank Gold Agreement increase their holdings of gold.

According to the report, gold prices have been on an upward trend since early 2003. After showing a rising trend since April 2003, gold prices had shown a slow downward trend from March-July 2004, before recovering and increasing thereafter.

In 2005, average gold prices increased from Rs 18,523 per ounce during January 2005 to Rs 23,298 per ounce during December 2005. In 2006, average gold prices increased from Rs 24,324 per ounce. during January 2006 to Rs 29,447 per ounce during July 2006.

Gold jewellery demand peaked in India to 659 tonne in 1998. However, demand subsequently declined to 459 tonne in 2002, owing to slowdown in agricultural production and significant rise in gold prices.

However, demand for gold jewellery increased 8 per cent during 2004 to 518 tonne, and 13.8 per cent during 2005 to 589 tonne.

Despite rising prices, demand increased, owing to the strong economic growth and positive impact on the income of rural population and a good winter harvest.