Demand for gold has surged ahead of supply as the government has strangled imports in a bid to save foreign exchange, say traders.
The import quota for the yellow metal has been slashed leading to less inventory, and bullion traders predict subdued festive sales despite a drop in prices.
Early signs of tepid festive sales were evident in the poor offtake during the Teej festival, they said.
Some jewellers to whom the Post talked said that sales had increased from last year, but the market has not rebounded to pre-Covid levels.
“This demand depression points to dismal sales during the Dashain and Tihar festivals,” said Tej Ratna Shakya, former president of the Federation of Nepal Gold and Silver Dealers Association.
“The demand depression, even though the prices have dropped, shows the unstable economic situation of the country,” he said.
Gold is a safe-haven investment globally and a hedge against troubled times, and that is its intrinsic value.
In Nepal, bridal jewellery is traditionally and culturally de rigueur during marriage rituals. Nepalis buy gold ornaments according to their means for special occasions. A middle-class Nepali family usually buys five to six tolas of gold for events like weddings. A tola is equivalent to 11.66 grams.
Most people buy precious metals during the festive season because it is believed to be auspicious.
Traders say they suspect there has been rampant smuggling of gold into the country after the government slashed the import quota.
Banks are allowed to import only 10 kg of gold daily as per the central bank’s policy.
“The market has a limited supply, and bullion traders are not able to cater to the growing demand,” said Shakya. “There is also a shortage of raw materials to make ornaments,” Shakya said.
Prices are gradually falling due to international factors.
“The Federal Reserve Bank of New York plays a leadership role in monetary policy, and is increasing the interest rate of banks for the third time to control the inflationary pressure due to which demand for gold dropped and its prices are falling as well,” Shakya said.
Although gold is seen as an inflation hedge, higher interest rates draw investors away from bullion.
The dollar held near 20-year highs, continuing to make greenback-priced gold less attractive for buyers holding other currencies.
According to an international media report, spot gold was 0.5 percent higher at $1,672.48 per ounce last Friday.
Although gold is considered a hedge against economic risks, rising interest rates make non-yielding bullion less appealing. Gold failed to capitalise on fears of rising US recession risks through the week, and was “not even perceived as a safe-haven” on occasion, the report said.
Shakya said that the price of gold may fall up to Rs90,000 per tola during the festive sales period in the domestic market.
The precious metal hit a record Rs105,500 per tola on March 9 before stabilising at Rs93,000 per tola for a few weeks. The price rose again to settle at Rs97,000 per tola, Shakya said.
The yellow metal was hovering at Rs75,000 per tola before the Covid-19 pandemic started in Nepal.
On August 7, 2020, the price of gold had reached a high of Rs103,500.
“With prices ticking down gradually, daily demand for gold has reached 30 kg,” Shakya said. “But Nepali banks are not issuing even 10 kg of the yellow metal,” he said.
Bullion traders say they have been urging the government to increase the import quota to 30 kg per day. “The government is not positive about our request. It can increase the daily gold quota to 30 kg for now.”
Despite inflation, demand for gold is rising mainly due to a fall in the price after reaching an all-time high of Rs105,500.
According to Nepal Rastra Bank, gold imports rose sharply by 55.3 percent year-on-year to Rs42.69 billion in the last fiscal year. The import value of gold was Rs13.63 billion in fiscal 2019-20.
The central bank said that the import restriction would remain in place for the time being.
“As we are focused on conserving the foreign exchange reserve, there is no immediate plan of the central bank to revise the import quota of gold,” said Gunakar Bhatta, spokesperson for Nepal Rastra Bank.
In April 2020, Nepal Rastra Bank slashed the daily gold import quota from 20 kg to 10 kg in a bid to stem the outflow of foreign currency.
But responding to high demand, the central bank increased the quota to 20 kg on April 3, 2021, while bullion traders had urged it to raise the limit to 30 kg.
On March 6, the central bank again cut the daily import quota to 10 kg.
Krishana Prasain is a business reporter for The Kathmandu Post covering markets. Before joining The Kathmandu Post in 2018, she spent 3 years in New Business Age magazine covering business.