This year is going to be one for the record books as far as the price of gold is concerned. What will impact the jewellery industry most, however, will be how steady gold prices will be.
MADHU SUDAN DAGA
Having breached the $900 per troy ounce level already, gold will not, at any time during this year, sink below the $880 mark. It will, most likely fluctuate between this lower level and $950 for a major part of the year. At some point in the year, it will definitely reach the $1,000 mark. This is likely to negatively affect jewellery sales in India particularly, where even now the intrinsic value of a piece of jewellery is of consequence. How expensive gold is, however, is not going to be an issue in the long run as consumers will begin to buy jewellery once prices settle at some level.
The price of gold is likely to remain volatile through this year unless a number of factors stabilise. The situation in the Middle East, particularly the civil war in Iraq, which has the United States embroiled in it, along with the efforts to bring some sort of peace between Israel and Palestine, developments in Pakistan, the price of oil, how the now likely recession in the US pans out and what happens in the US presidential elections are among the key factors keeping price of the yellow metal constantly in change.
The effects of this volatility will be felt in the Indian jewellery market, even in the one-gram-gold segment though the impact here will be the least. This segment will also be the first to recover from any ill effects and bounce back. I see one-gram-gold as doing extremely well through 2008, particularly if the recent trends towards more organisation of the sector continue. More organisation will mean greater efforts at consumer confidence, which in the long run is essential for the segment to continue enjoying the popularity it does now and actually grow.
The rural population of India, by far the largest gold-consuming section in the country, is with greater media exposure, particularly satellite television, increasingly becoming more demanding of quality and content assurance. The jewellery industry will have to pay a great deal of attention to this. While the government has temporarily shelved plans to make hallmarking mandatory, voluntary efforts by the jewellery manufacturing and retailing industry will be crucial in determining sales throughout this year.
In the investment market, gold will continue to perform strongly throughout the year as despite short-term fluctuations, the overall upward march of gold prices is something understood by almost everyone. This, along with the continued growth of prosperity in rural India, will drive bullion sales for investment strongly this year.
I estimate India’s total gold consumption this year will be 1,110 tonnes, with new gold imports at around the 810-tonne level. The overall off-take for scrap (old jewellery) will be in the region of 332 tonnes.
In mid-December, there were reports that many medium- and small- gold jewellery shops were melting their jewellery into bars and selling them in order to meet their liabilities or benefit from the price rise.
I expect to see a major increase in the production of medallions (non-legal tender coins) for the investment market this year from both jewellery manufacturers/retailers as well as financial institutions like banks. The Reliance group, which has recently entered the jewellery retail sector and plans a major countrywide expansion, will be among the big players marketing medallions for investment. The sort of consumer assurance that this group and the banks provide will go a long way towards promoting sales of this investment category.
The high price of gold will, I feel, be beneficial for the growth of silver jewellery, particularly the modern, design-heavy variety that can be fabricated with alloys that won’t tarnish the way traditional silver jewellery does. Silver prices too will show overall growth this year.
For both gold and silver, volatility in prices will be the single biggest determining factor in how the metals perform.
