The steep fall in gold prices over the past couple of days has had a rub-off effect on the stocks of gold jewellery sellers, most of whom lost up to 6% of their value. That seems surprising. After all, won’t demand for gold ornaments improve if prices fall?
The answer is a bit more complicated. According to the World Gold Council and some brokerage estimates, a little more than half the demand for gold jewellery in India is for marriages, the part which is relatively more inelastic. It is mostly this segment of consumers who are still buying gold, said analysts.
The rest is discretionary demand, for which this may not be the best of times owing to a weak macroeconomic environment in India. Gold bears are suggesting that the yellow metal may fall further as the world economic outlook improves while brokerages such as Goldman Sachs have cut their price forecasts.
Still, investor concerns centre on the sharpness in the gold price fall. On Friday, international gold prices fell 5%, followed by another 5% on Monday at 5pm local time. Such volatility in gold prices makes the consumer hesitant about immediately buying ornaments. Typically, consumers will wait for some stability in gold prices before they commit to a purchase.
Secondly, gold making charges are typically linked to prices of the metal. Falling gold prices could potentially eat into the margins of jewellery makers. Thirdly, sharply falling rates of the yellow metal also lower the value of ornament inventories. This is especially true for smaller jewellery makers while the big firms like Titan Industries Ltd hardly have any inventory costs because they lease gold.
The net effect is that it’s the sharp fall in gold prices that is the demand killer for jewellery sellers. While that would mean lower gold imports and thus, some succour for the country’s current account deficit, the underperformance for jewellery sellers will continue for some more time.
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