Gold demand in India, the world's largest bullion buyer, will be strong in the October-December quarter, a traditional time for festivals and weddings, despite high inflation that eats into savings and multiple growth-choking central bank rates hikes.
We think that demand from India will be resilient to higher gold prices for the remainder of the year on the back of seasonality and increased investment interest, said Edel Tully, strategist of UBS, the biggest supplier of the metal to India.
Global gold prices have risen more than 20 percent so far in the year, and are expected to gain further, as dwindling appetite for risk prompts investors to rush to safe havens such as gold.
In India, gold prices have gained 29 percent since the start of the year, compared with just 15 percent gains in the stock market.
Indian gold imports rose 47 percent to 265 tonnes in the last quarter of 2010, continuing a strong trend to end at a little over 950 tonnes last year.
Indian demand is expected to peak by the end of the month when the festivals of Dhanteras and Diwali are celebrated. The wedding season lasts a couple of months more.
Demand for gold bars, coins and other pure investments in India, Asia's third-largest economy, soared 83 percent in 2010 from the year earlier to 349 tonnes, according to GFMS, a precious metals consultancy that is part of Thomson Reuters.
Gold used for jewellery rose 36 percent to 685 tonnes in 2010. Investment demand accounted for 34 percent of total buying, up from 28 percent in 2009.
Such demand has not been dented by stubbornly high inflation, hovering around double digits for over a year, prompting the RBI to raise interest rates a dozen times in the past 18 months. Its key rate stands at 8.25 percent.
My sense is that demand will be 30-40 percent higher than the fourth quarter of 2010. Investment demand is already on a peak, said Gnanasekar Thiagarajan, director with Mumbai-based research firm Commtrendz.
So, I suspect unless some major geo-political crisis starts investment demand will peter out in the fourth quarter.
Continued appetite from India is also likely to provide underlying support to global gold prices, which entered into an eleventh year of gains.
Gold demand will be very decent. The price has come off noticeably, restoring its buying value. I think Indian demand will give the gold price modest upward momentum but not exclude others in Asia from buying, said David Thurtell, an analyst at Citigroup.
Importers and traders said the focus will remain on gold investments, though need-based jewellery buying could take place due to thousands of weddings that take place every year.
Jewellery forms a major part of the dowry basket, which parents give the bride for financial security.
Spot gold was higher at $1,674.09 an ounce on Tuesday, easing from a three-week high of $1,694.60 hit in the previous session. Prices are still down more than 12.5 percent from the record of $1,920.30 struck in early September.
Physical demand from India plays a supportive role in the gold market, but is unlikely to single-handedly push prices above $1,700. In the event we see prices fall to $1,500s, physical demand could cushion the downside, said Ong Yi Ling, an analyst at Phillip Futures in Singapore.
It is investment demand that propels prices higher.