--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 21 Gold bulls tend to
flit from one thing to the next in their search for a reason for
the precious metal to rally, with the latest hope being Narendra
Modi's election victory in India.
The reasoning appears solid enough. Modi's pro-business
Bharatiya Janata Party is likely to roll back some of the tough
measures taken by the former government to curtail gold imports
as part of efforts to lower India's current account deficit.
Gold is India's second-biggest import by value behind crude
oil and the former government progressively raised the import
duty to 10 percent and imposed a rule that 20 percent of gold
shipped in must be re-exported as jewellery.
These measures, which gold bulls had largely dismissed as
irrelevant to Indian demand, served to crunch imports, which
started dropping sharply from the third quarter of last year.
Indian demand fell 26 percent to 190.3 tonnes in the first
quarter of 2014 from the same period a year earlier, according
to data from the World Gold Council (WGC).
This followed falls of 16 percent in the fourth quarter of
2013 and 32 percent in the third quarter of last year, declines
which saw India surrender its status as the world's top gold
consumer to China.
One thing the gold bulls may have correct is that Indian
demand is still there, and it has just been hit by government
The key question is how quickly is Modi's new government
likely to lower the import duty or relax the re-export
While Modi may well be well disposed to the gold sector,
he's likely to be swamped with other priorities at the start of
He's also likely to be reluctant to give a signal that it's
"game on" for gold imports again, as he won't want the current
account deficit to start heading the wrong way once more.
India's current account deficit was likely about $35 billion
in the fiscal year ended March, the former finance minister said
on March 31, lower than the $88 billion for the previous year.
At the current spot gold price of about $1,294 an
ounce, each additional 100 tonnes of gold imports adds about
$4.56 billion to the current account deficit.
If the first quarter demand of 190.3 tonnes was maintained
through the year, it would take total demand for the year to
about 761.2 tonnes, short of the 900-1,000 tonnes the WGC
expects for Indian demand in 2014.
Assuming Modi does relax restrictions on bullion and the WGC
forecast is met, the impact of additional Indian demand is
likely to be felt in the last quarter of 2014.
Even if India's demand does recover to around 1,000 tonnes
in 2014, will that be enough to spark a rally?
CHINA, CENTRAL BANK DEMAND STEADY
The WGC is expecting demand in top consumer China to be
largely steady at about 1,000-1,100 tonnes.
While this level of demand is no doubt supportive for gold
prices, it doesn't imply a rally in prices.
There are also some concerns about Chinese demand in the WGC
quarterly report, released on Tuesday.
While jewellery demand in China grew a strong 10 percent in
the first quarter from the same period in 2013, investment in
bars and coins slumped 55 percent, leaving overall demand down
It was the third straight decline in investment demand in
China, which may be a sign that investors there are losing
patience with gold's inability to rally, and may be starting to
worry that the yellow metal's next move is to the downside.
Gold has gained 7.3 percent so far in 2014, reversing some
of its 26.4-percent decline in 2013.
But after reaching its high of $1,391.76 an ounce on March
17, it has slipped to a close of $1,293.80 on Tuesday and has
traded in a relatively narrow band in the last two months.
Outside of the potential for increased Indian demand, there
appear few positive drivers for gold.
The WGC report showed that demand from exchange-traded funds
was largely flat in the first quarter, and while this is an
improvement from the huge selling seen last year, it's hardly
reason to believe a rally is imminent.
Technology demand, which accounts for about 10 percent of
total consumption, dropped in the first quarter from the same
period a year earlier, and the WGC pointed to rising use of
alternatives in electronics manufacturing.
Central bank purchases were also down in the first quarter,
and appear to have settled in a range either side of 100 tonnes
a quarter, a level that wouldn't provide much price impetus in
The gold market appears largely in a "wait-and-see" mode,
lacking sufficient drivers to move the price.
Increased Indian demand, should the new government allow it,
will be a positive, but probably not enough to spark a
significant price recovery by itself.
(Editing by Joseph Radford)