MUMBAI -- The rally in Indian stock prices since early March has spooked investment interest in gold in the world's largest market for the yellow metal.
With equity markets poised to rise further following the re-election of the Congress party-led government, the possibility of a pickup in investment interest in gold now looks remote, analysts say.
World Gold Council data showed investment demand in gold fell during the January-March quarter for the first time since it began compiling the numbers.
"As long as we can see gains in equity market, there would be asset reallocation," said Debjyoti Chatterjee, associate vice president of Admisi Commodities. "Funds will try to shift out of commodities - primarily gold - and move to equities."
India's benchmark Sensex, currently around 13,800, has advanced nearly 70% from its 2009 low of 8,160.40 on March 9, outperforming most global indices.
During the same period, high prices combined with low demand, both from investors and jewelry makers, flattened Indian gold imports to nearly zero in February and March.
Imports picked up briefly in April, but demand has again plummeted in May.
Suresh Hundia, president of the Bombay Bullion Association, said only 8-10 tons of gold have been imported so far this month. Last May, the country imported 29 tons of gold, according to the trade body.
"At this moment there is not much demand for gold," he said, adding that demand would improve only if prices fell.
Jewelry demand during the January-March quarter was the lowest in 20 years at 34.7 tons, while retail investment demand turned negative for the first time, falling by 17 tons, according to data released by the World Gold Council Wednesday.
"The trend will continue. There has been not much investment demand in the last four-five months, while jewelry off-take has been slow," said Daman Prakash, a director with bullion trading firm, MNC Bullion Pvt Ltd.
Investment demand accounted for 29% of India's total demand of 660.2 tons in 2008, according to the World Gold Council.
Unlike in the West, there were no major economic triggers in India in the last few months to prompt investors to rush to gold for safe haven buying, Mr. Prakash said.
"India is relatively better off than other world economies and investors are not in a hurry to go in for gold investments," he said.
The Indian rupee is expected to remain strong for the next couple of weeks, making local gold cheaper, but industry officials expect investment interest to remain lackluster during the April-June quarter.
The Indian rupee has appreciated about 7% against the U.S. dollar since April.
"As the equity market is going up, people seem to be shifting there (from gold)," said Kapil Gandhi, a broker with STCI Commodities.
A clear win by the Congress Party-led United Progressive Alliance has improved market sentiment and may help Indian stocks and rupee gain further on improved foreign investor sentiment, traders said.
The bullishness in the stock market and a stronger rupee are expected to weigh on domestic prices of gold, but industry officials doubt if that will be enough to lure buyers back.
The rupee's gain, in part fueled by domestic factors such as increased political stability, has also been a result of the recent weakness of the U.S dollar, which in turn has been pushing gold higher in the international market.
"Gold prices may come down to 13,800 rupees ($292)/10 grams in June if the rupee appreciates to 45 rupees to 46 rupees level," said Gandhi of STCI Commodities. At 0500 GMT, the rupee was trading around 47.13 to a dollar.
However, higher international prices will limit the benefits of a rising rupee, putting a floor below domestic prices.
Moreover, even if domestic prices fall, consumers will be cautious until "prices stabilize. Otherwise, they feel it is going to fall further," said Rajiv Popley, director of Popley Group, a large retail jewelry chain in the country.
Once domestic prices stabilize at a lower level, one can look forward to normal demand as the wedding season gets closer, he added.
"Customers are currently in a wait-and-watch mode (because) they have seen lower prices than these," said Mr. Prakash.
View on WallStreet Journal date 22nd May,2009 link as follow.
http://online.wsj.com/article/SB124297429601246675.html
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