The World Gold Council published its report on 2016 gold demand and gives an outlook for 2017.
In 2016, India's demand for gold was 675.5325 tonnes, a 21.1967% decrease on a year-over-year basis, the lowest level in the last seven years.
The chart below shows the trend in Indian consumer gold demand over the last seven years.
Source of data: World Gold Council
The council attributed the decrease in demand to a 42-day strike in the jewelry industry due to the application of a 1% tax on manufacturing, the postponement in the purchase of gold by some consumers and the liquidity crunch as a consequence of the demonetization of 15 trillion rupees ($220 billion).
The negative impact on gold demand was exacerbated due to low expectations of the Indian economy and the increase in the price of gold per ounce that characterized the market in 2016.
The liquidity crunch negatively influenced the Indian economy, with the informal sector suffering the consequences of demonetization the most.
The council said that “in December, domestic sales of motorcycles – a good measure of the health of India’s cash-reliant rural economy – halved in a month, falling to the lowest level in over six years.”
These negative shocks in the Indian economy are seen as short-term impacts, however, and the economy is expected to rebound as the workforce will gain an increasing number of young Indians.
According to the report, the World Bank expects a 7.8% growth in the Indian economy over the next three years, backing the domestic demand for gold.
The council expects the Indian consumer gold demand will be 650 tonnes to 750 tonnes bought in 2017. Over time, it foresees “economic growth and greater transparency within India’s gold market will push demand higher” and consumers buying between 850 tonnes  and 950 tonnes starting in 2020.
Why is this report important?
Knowing exactly what is moving the Indian consumer gold demand is crucial for estimating the price of gold in 2017 and beyond. India is the second-largest consumer of the precious metal in the world after China.
Source of data: World Gold Council
In 2016, India accounted for approximately 18% of the world's total consumer demand for gold.
Disclosure: I have no positions in any securities mentioned in this article.
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