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Commodities

Asia's retail gold demand sinks as price hits 9-year high

As 1 ounce nears its record of $1,923, retailing in India and China proves tough

In India and China, retail demand for gold jewelry has fallen as shoppers stay home due to the coronavirus pandemic.   © Reuters

TOKYO/NEW DELHI/SHANGHAI -- As global gold prices near record levels, pushed higher by investors looking for a safe haven amid the novel coronavirus pandemic, Asia's retail demand for physical gold has taken a beating.

Gold has become more expensive as investors fret over uncertainty due to the COVID-19 pandemic. With no clear end to the outbreak in sight, central banks have opened the monetary taps, encouraging buying among people looking for a safe asset in which to park their cash.

Benchmark gold futures in New York hit a nine-year high in early July, reaching $1,820 an ounce, compared with $1,528 in early January and $1,400 a year ago. The price is around $1,808 as of late July.

As the price soars, gold index prices in Asian currencies have also climbed.

Physical gold traded on the Shanghai Gold Exchange closed at 401.91 yuan ($57) per gram on July 9, up 17% so far this year. That is the highest price on record since the benchmark was created in June 2016.

In India, gold traded around 39,000 rupees ($520) per 10 grams at the beginning of the year. Now it is above 49,000 rupees. A year ago, the price was hovering around 35,000 rupees. In Japan, the index retail price recently hit a record high of 6,909 yen per gram on Wednesday, including tax.

The steadily climbing gold price reflects growing uncertainty over course of the coronavirus pandemic. The first case was reported in China late last year. By July 13, roughly 13 million people had been infected, according to Johns Hopkins University.

The pandemic and subsequent lockdowns were a heavy blow to many economies and central banks have responded with monetary stimulus to keep them afloat. In the U.S., the Federal Reserve cut interest rates essentially to zero in March and launched a massive $700 billion quantitative easing program.

In Asia, the Bank of Japan is continuing its own huge asset-buying program, while the Reserve Bank of India in May cut its benchmark interest rate 40 basis points to 4% in a surprise move.

Against the backdrop of easy monetary policy, "investors who did not buy gold before have come to buy gold," said gold market analyst Koichi Kamei.

According to the World Gold Council, global net inflows into gold-backed exchange-traded funds reached $39.5 billion, topping the previous annual inflow record set in 2016. As of June, gold ETFs had seen global net inflows for seven consecutive months.

"The inflows to gold ETFs show that more people are focused on buying and holding gold for longer time periods," said Kamei, who called the commodity "one of the few options" for investors as global stocks remain below where they started the year and crude oil one of the worst-performing assets this year, down by nearly 30% since the pandemic took hold.

The combination of global economic uncertainty due to the pandemic and strong prices mean that "gold hedging is becoming appealing to the public," said Allison Malmsten, an analyst with market researcher Daxue Consulting in Shanghai.

In an uncertain, low-interest environment, central banks are also showing interest in building up their gold reserves. According to the 2020 Central Bank Gold Reserves (CBGR) survey, 20% of central banks plan to increase their reserves over the next 12 months, compared with just 8% of respondents in the 2019 survey. As of May, central bank gold reserves reached 34,904 tons, up 2% from the end of 2018.

When it comes to physical demand, however, the top two buyers -- China and India -- have been reluctant due to the fears over the coronavirus.

China's jewelry demand plunged 65% to 64 tons in the first quarter, as consumers focused their buying on essentials during the coronavirus outbreak, according to the World Gold Council. "Sales dropped by at least half, compared with last year," said one retailer in Shanghai. The rise in the price is not helping with consumption, she added.

"Jewelry stores being closed during the pandemic was a huge issue for sales. Even after stores slowly reopened, there were very few customers," said Daxue Consulting's Malmsten.

In India, which has been under the world's harshest lockdown since March, Abhishek, who helps his father run a jewelry shop in a middle-class neighborhood in New Delhi, said business has been weak. "Many of our regular customers are not turning up at the store due to the fear of coronavirus," he said. "Besides, there's growing unemployment and people do not seem to have enough [money] in hand to spend on jewelry."

India's gold imports reportedly plummeted 86%, year-on-year, in June owing to record-high prices, the ban on international air travel and the closure of many jewelry stores.

Gold plays a vital role in Indian culture and serves as a status symbol and a key indicator of consumer spending in the country. Demand is strongest in the August to October festival period, followed by the November to May wedding season.

Purnima Pokhriyal, a New Delhi homemaker who used to buy gold jewelry at regular intervals, has lost interest in additional purchases. "Even if I buy anything, where can I wear it? I haven't met extended family or close friends for months as everybody is keeping themselves indoors," she said. "I was very fond of donning gold, but since I'm not stepping out much I've stopped wearing and buying it now."

In response, some retailers are moving online to reach consumers. "Gold jewelry demand is good, but because of the coronavirus pandemic people are afraid to visit stores," said G.V. Sreedhar, who owns a jewelry showroom in Bangalore. "Now we show our products to customers through video calling, where [customers] place the order and come to the store just to pick up the jewelry. This way they do not have to spend much time in the shop."

In China, e-commerce players have set their sights on younger buyers, who are spending on themselves rather saving up for a wedding as they delay marriage. Sales of luxury products, including French fashion label Chanel's Goossens jewelry brand jumped 400% compared with the previous year on June 1, the first day of JD.com's summer sales campaign.

In Japan, the number of new members who signed up to a service offered by gold retailer Tanaka Kikinzoku that allows people to buy fixed amounts of pure gold every day rose 2.6 times in the first half of the year compared with the same period last year. "Many people have signed up because they can purchase gold online without having to come to the store," said a company representative.

Many market analysts believe gold prices may hit a record high in the near future if the world fails to contain the spread of the virus. "It is possible for gold to touch the $2,000 per ounce level this year," said gold analyst Kamei.

Another commodity analyst, Tatsufumi Okoshi at Nomura Securities, says the situation with respect to COVID-19 in the next three months will be key for gold prices. "If the U.S. fails to contain the spread of the coronavirus and has to ramp up its massive quantitative easing, it is possible that the price will soar above $1,900 [an ounce]," said Okoshi.

Sreedhar, the gold retailer in India, agrees. Everybody is confident that commodities' rates are going to touch very high [levels], he said. "Keeping their confidence in gold, people are buying it. Gold is a good asset to keep [and the market] is going to be very bullish," he said.

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