Investment and jewellery demand within India is often decidedly blurry.

This is one of the many reasons why the Indian government’s quest to rein in gold imports is rather quixotic and, it begs the question, how sustainable is the current regulatory framework?

In its daily precious metals note, UBS asks exactly that, commenting that, while the situation is fluid, “There is a clear recognition of the reality that a decent portion of demand – particularly in the form of jewellery and ornaments linked to festivals and wedding traditions – will remain intact.”

This is supported by Standard Bank, that writes in its latest Commodities strategy note, that, although premiums in China fell somewhat in recent sessions, “looking at gold physical demand more broadly in Asia, our Standard Bank Gold Physical Flow Index indicates that demand remains relatively healthy, actually been rising in the past week.”This, the bank says, is a positive sign, “indicating a higher gold price in the next few days,” adding, “Part of such a rise in gold demand would be seasonal factors.”

According to UBS, while jewellery demand remains robust, it says, the investment element of gold demand in India, which is, admittedly, rather smaller than jewellery is likely to be affected. And, while it accepts that because of the potential for blurring mentioned earlier, accurate levels of investment demand are difficult to ascertain, it says: “feedback from the ground is that the former [investment] has come off this year”.

This decline in investment demand, UBS says, is the result of pressure from global gold sentiment combined with restricted supplies and is visible in the lower flows seen into Indian ETFs as well as the appetite for investment products like coins (small bars).

“The difficulty in accessing the yellow metal, especially in the second half of this year, has likely driven some of the investment demand towards silver. Reports have pointed to a strong surge in the country’s silver imports, which ties in with the pick-up in silver flows noted by counterparties with whom we’ve spoken,” it adds.

For UBS, the upcoming elections in India will be an important signpost for the local gold market.

“The outcome could impact gold regulations through its effect on expectations for the economy and the direction of the currency. The general view for now is that some changes could occur; most expect these changes to be broadly within the current framework, although a more significant shift could not really be ruled out either.”

By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

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