(Kitco News) - The world’s top two gold-consuming nations could potentially see a divergence in demand in the second half of the year.
On Tuesday, the Indian government announced a plan to slash its import tax on gold and silver from the current level of 15%.
"To enhance domestic value addition in gold and precious metal jewelry, I propose to reduce customs duties on gold and silver to 6%," India's Finance Minister Nirmala Sitharaman said in a budget speech.
Some analysts note that India has seen solid demand this year even as prices have rallied to record highs. There are expectations that the drop in import taxes will spur further demand in the second half of the year.
Sachin Jain, CEO of the World Gold Council's Indian operations, said in a comment to Reuters that the drop in import taxes will level the playing field in India’s gold market and reduce smuggling. He added that the cut was a “move in the right direction” for India’s gold industry.
Soni Kumari, Commodity Strategist at ANZ, anticipated the cut last week. She said that she expects increased demand will provide solid support for global gold prices.
Chinese demand starts to slow
While Indian demand is expected to continue to grow, markets are starting to see a slowdown in Chinese demand after unprecedented consumption at the start of the year.
Many analysts noted that China’s insatiable appetite for the yellow metal was a primary reason for its record highs last month. Gold continues to see solid momentum as prices hit a fresh all-time high last week above $2,480 an ounce.
However, as many analysts note, higher prices cure higher prices.
Analysts at BMO Capital Markets said that recent trade data shows Chinese gold imports plunged last month to the lowest level in over two years.
“As a result, Shanghai spot prices have fallen to a rare discount to the international benchmark this month,” the analysts at BMO said.
Along with weakening consumer demand, the People’s Bank of China did not increase its gold reserves in May and June, ending an 18-month shopping spree.
BMO said that while China’s central bank is expected to continue its gold purchase program, retail demand could prove to be a little more challenging.
“We think there is a good chance that the PBOC will return to the market in the coming months to shore up its bullion reserves; however, it may take time for the wider consumer base to adapt to a new higher gold price,” the analysts said.
