Post GST, India’s Gold jewellery demand fell by 25% in Q3 2017 in India

The H1 recovery in Indian jewellery demand was derailed in Q3 by regulatory intervention. After three consecutive quarters of growth, demand fell by 25 per cent Y-O-Y to 114.9t in the third quarter, according to the World Gold Council’s latest Gold Demand Trends report. The introduction of the 3 per cent Goods and Services Tax (GST) at the beginning of July was a contributing factor. As the report noted in Gold Demand Trends Q2 2017, a large swathe of Indian consumers had pre-empted the introduction of GST by bringing forward their gold purchases to Q2. This left demand a little flat at the beginning of July.

The jewellery trade also struggled with the new tax system. While large, organised retailers, with their sophisticated accounting and inventory-management systems, were well equipped to cope with the transition to GST; smaller, unorganised retailers faced difficulties.

Onerous anti-money laundering regulation added to the industry’s woes. Already suffering from weaker sentiment, the jewellery industry suffered a further blow when the government brought the gems and jewellery industry under the umbrella of the Prevention of Money Laundering Act (PMLA) in late August. The Act placed an administrative compliance burden on retailers and consumers alike, requiring ‘know your customer’ (KYC) documentation for all jewellery transactions with a value of Rs50,000 (roughly equivalent to US$750) or above. Demand therefore remained under pressure, particularly in rural India, where cash transactions are the norm, as consumers shied away from providing official ID to support gold purchases.

Recognising the difficulties placed on the industry by the regulation, the government lifted the PMLA from the gems and jewellery sector in early October. This decision was well-timed, coming just ahead of Diwali. Consumer sentiment improved dramatically, although reports suggest only average festive-season buying due to the continuing obstacle of GST.

Somasundaram PR, Managing Director, India, World Gold Council said: India’s gold demand was down 24 per cent Y-O-Y to 146t in Q3 2017, as the newly introduced Goods & Services Tax (GST) and anti-money laundering legislation (AML) around jewellery retail transactions deterred gold buyers. After three consecutive quarters of growth, jewellery demand fell by 25 per cent to 115t Y-O-Y in Q3; bar and coin demand also fell by 23 per cent to 31t. The drop can be attributed partly to some advance buying in Q2 to pre-empt the introduction of GST in Q3. However, with the industry’s gradual transition to GST proceeding on expected lines, and the removal of AML legislation, demand during the festive season seems to show clear signs of recovery in Q4. This is also underpinned by the faster growth in imports ahead of demand, and price factors in the market.

Headwinds for demand continue though, following various measures since early 2016 to boost transparency, and therefore we expect full year demand in 2017 to be well below the 5-year average, our estimate being between 650 to 750 tonnes, the lower end of the range being more likely.

Global Gold Demand

Global gold demand in Q3 2017 was 915 tonnes (t), a drop of 9 per cent compared with the same period in 2016, according to the World Gold Council’s latest Gold Demand Trends report. This decline was led by two key factors: a softer quarter in the jewellery sector and significantly lower inflows into exchange-traded funds (ETFs).

Global jewellery demand was down 3 per cent Y-O-Y in Q3, as the newly introduced Goods & Services Tax and tighter anti-money laundering regulations around transactions in India deterred buyers. While ETFs had another quarter of positive inflows, these fell far short of the remarkable 144t influx into the sector in Q3 2016. By contrast, demand from other sectors consolidated: central bank demand was healthy in Q3, up 25 per cent year-on-year to 111t, while bar and coin investment strengthened by 17 per cent to 222t, albeit from a low base.

Gold jewellery demand fell in Q3 2017. A weak quarter in India was the main reason for the year-on-year decline in global demand, down from 495t in Q3 2016 to 479t in Q3 2017. Jewellery volumes continue to languish below longer-term average levels.

Tax and regulatory changes in India weighed on domestic gold demand. The new GST regime deterred consumers, as did new anti-money laundering regulations governing jewellery retail transactions.

Inflows into gold-backed ETFs stalled: holdings grew by just 19t. Investors continued to favour gold’s risk-hedging properties, but the greater focus was on buoyant stock markets.

Gold bar and coin demand growth was driven in large part by China. Global investment in bars and coins rose by 17 per cent, from relatively weak year-earlier levels. Mainland investors in China bought on price dips, clocking up a fourth consecutive quarter of growth.

Central bank demand of 111t in Q3 was 25 per cent higher Y-O-Y. Russia and Turkey together added nearly 95t of gold to global official reserves.

Volumes of gold used in technology increased for the fourth consecutive quarter. Strong demand for LEDs and continued growth in the use of 3D sensors in new smartphones boosted demand by 2 per cent.

Alistair Hewitt, Head of Market Intelligence at the World Gold Council, commented: “It was a tough quarter for gold demand. India was coming to terms with GST and anti-money laundering regulations and, although we saw ETF inflows at 19t, they were significantly lower than last year. But there were some real bright spots: retail investment demand in China grew for the fourth consecutive quarter; the Turkish and Russian central banks added to gold reserves; and, after years of declines, we also saw increased use of gold in technology, supported by the demand for high-end smartphones.”

Total supply fell 2 per cent in Q3 2017. Mine production fell 1 per cent Y-O-Y in Q3, which was also the fifth consecutive quarter of net de-hedging. Recycling activity continued to normalise after jumping in 2016.

The key findings included in the Gold Demand Trends Q3 2017 report are as follows:

• Overall demand was 915t, a fall of 9 per cent compared with 1,001t in Q3 2016
• Total consumer demand rose by 2 per cent to 701t, from 686t in the same period last year
• Total investment demand fell 28 per cent to 241t compared with 335t in Q3 2016
• Global jewellery demand dropped 3 per cent to 479t, from 495t in the same period last year
• Central bank demand climbed 25 per cent to 111t compared with 89t in Q3 2016
• Demand in the technology sector increased 2 per cent to 84t compared with 83t in Q3 2016
• Total supply was down 2 per cent to 1,146t, from 1,168t in the same period last year
• Recycling fell 6 per cent to 315t compared with 335t in Q3 2016