FX.co ★ XAU/USD, GOLD

XAU/USD Commerzbank strategists have drawn attention to growing concerns expressed by India's jewellery sector regarding a possible future decline in the country's demand for gold jewellery a sector that plays a crucial role in the physical gold market. According to the strategists, Prime Minister Narendra Modi has advised the citizens to refrain from buying gold for at least one year, with the explicit goal of safeguarding the nation’s foreign exchange reserves. This appeal comes at a time when global economic uncertainty and currency pressures have made reserve management a high priority for emerging economies such as India.If this appeal is widely disregarded, the strategists point out that the government could respond by raising import taxes on gold, a move that has been used in the past to curb demand and reduce outflows of foreign currency. Meanwhile, India’s jewellery industry fears a further setback in jewellery demand, which is already under pressure from record-high gold prices. Over the weekend, Prime Minister Modi reiterated his call for citizens to voluntarily limit gold purchases for at least a year in order to preserve the country’s foreign exchange reserves.Notably, despite high prices, gold purchases by value were the greatest ever recorded in a first quarter even though India actually bought much less gold jewellery by weight in the same period. In tonnes, purchases were nearly 20% lower than the previous year, underscoring just how much prices have risen. Whether the prime minister’s appeal will have any practical impact remains to be determined. If voluntary restraint proves ineffective, import taxes can be increased once more by the government, the strategists conclude.