Search the Internet          Tips  Sites: Finance, Investment

Quake will knock Indian gold demand

The earthquake which ravaged Gujarat last week, killing thousands of people, has cast a dark cloud of uncertainty over precious metals markets, analysts said on Monday.

India typically accounts for around 20 per cent of world gold consumption but, as the people of Gujarat struggle to rebuild homes, buying jewellery or gems will be far from the forefront of their minds. "Indians traditionally buy gold as a status symbol. But if they have no job, no money, who will buy?" one analyst said.

The quake, the most powerful to strike India in half a century, killed up to 20,000 people and injured thousands more in the province, a major centre for Indian gold imports.

Before the earthquake, gold demand had already been depressed by severe droughts and monsoons which hit the incomes of the rural Indians who form the bulk of the consumers.

"It's an additional drag factor on Indian (gold) demand which was already suffering," said Merlin Marr-Johnson, analyst at HSBC in London.

Demand capped

The effects of drought over the past two years were seen keeping a lid on demand. While previous forecasts for this year stood at 850-900 tonnes compared with an estimated 850 tonnes in 2000, experts expected the quake to subdue trade further.

Analyst Kamal Naqvi at Macquarie Equities Ltd in London said that experience of past earthquakes showed this one would certainly have a significant impact on demand, citing the disaster which hit western Turkey in August 1999.

"That earthquake had an impact on gold demand which was down 30-40 percent. I'm not suggesting this one will have an effect of that magnitude but it will certainly be significant," he said.

Ahmedabad, Gujarat's largest commercial city, is the main hub of Indian gold and silver imports and the area was expected to be in difficulty for some months to come.

"I expect it will lead to at least a 10 percent fall in (Indian) demand this year -- beyond that will depend on how fast they recover," Naqvi said.

Market has negative bias

But analysts warned that while the earthquake would clearly hamper demand, it was just another dampener in an already bleak world demand picture.

"You've got to put the whole thing in the context of what's happening globally -- economies are slowing. The whole jewellery demand side for gold is not very robust at the moment, it's just more not very good news," HSBC's Marr-Johnson said.

The market had also had a tendency lately to be more willing to react to bad news than good, analysts said.

Dollar weakness in recent months and a positive result from last week's UK bullion auction were both in theory supportive of the gold price -- but the metal failed to react positively.

Instead, any marginal strengthening in the dollar -- which is bad news for gold as it makes it more expensive -- tends to have an immediate effect in lowering the gold price.

"So this quake just adds more downward pressure," said Naqvi. "It (price) will now probably head towards $260-$262."

US dollar strength against the rupee also had a negative effect on demand last year as gold became more expensive for local consumers.

By 1055 GMT spot gold was trading in Europe at $263.00/$263.50, just up from New York's Friday close at $262.80/$263.30.

Analysts said all the factors expected to hit gold demand also applied to silver, of which India is also a key consumer.

Like gold, silver saw lower offtake in India last year due to drought and flooding in different parts of the country and the rupee's slide to lifetime lows against the dollar.

Tell us what you think of this report