Almost 60% of gold goes into jewellery. India and China attach cultural importance to gold and holds major share of world's jewellery. In 2012, consumer demand in India for gold fell 12% in volume terms (in terms of weight); given the sharp increase in gold price and import duty structure and decline in rupee value, Indian consumers ended up spending 6% more money (in value terms) buying gold last year.
Internationally gold price has been declining for last six months after a sharp rise in August / September last year. Encouraging economic and employment data from the US has been forcing investors to review their asset allocation and reduce gold holdings albeit slightly. Hedge funds look poised to further liquidate gold positions, however a lot depends on Fed's monetary stance; if it continues to pump in liquidity, some of it would find it's way to gold (buying).
So will gold go up or down? Difficult to say. What looks likely is, increased gold volatility.
World Gold Council for India expects gold consumption to grow this financial year. This in itself is good news for domestic jewellery industry. However increased volatility in gold price combined with foreign exchange fluctuation and ever increasing import duty is likely to make the job of protecting profitability even more difficult.
Retail jewellers buy gold in bulk and sell (to retail customers) on a daily basis. This creates maturity mismatch. In a volatile market, impact of maturity mismatch (or any risk) could be more pronounced. It is important to align timing or quantity (or both) of sales and purchase of gold. One could use forwards, futures or a combination of both to mitigate risk.
Key is to study purchase and sales pattern and arrive at a hedging strategy that:
(1) minimises risk
(2) is operationally less cumbersome.
Kamala Aithal is the founder of a consulting firm that assists corporates develop Risk ManagementFramework and a regular contributor to Wisonomics column. The views and opinions expressed in this article are those of the author and does not reflect the views or position of IndiaNewsBulletin.com.