Gold demand slumps as Indian consumption shrinks
Global demand for gold slumped in the July-September period as bullion-backed exchange traded funds (ETFs) continued to suffer sizable outflows and Indian consumption was heavily dampened by government restrictions, the World Gold Council said.
The third quarter saw a 21 percent on-year contraction in gold demand to 869 tons, according to the WGC's quarterly Global Demand Trends report published on Thursday.
Gold-backed ETFs saw net outflows of 119 tons during the quarter, as investors continued to scale back their exposure to the precious metal in anticipation of the Federal Reserve winding down its monetary stimulus.
While it was the third consecutive quarter of net outflows, the pace of liquidation from the ETFs slowed from 402 tons in the previous three months.
In India, meanwhile, the government's crackdown on gold imports, coupled with weakness in the rupee, suppressed demand. Gold consumption fell to 148 tons in the quarter - a 32 percent on-year decline.
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In the recent months, the government has implemented a string of measures to curb gold imports in an effort to control the current account deficit.
Since July, it has imposed a total ban on the import of gold coins and further tightened restrictions on bullion imports by tying them to a fixed level of exports via the 80:20 rule. This rule stipulates that 20 percent of all gold imported must be exported before further imports can be made.
"The intervention of the Indian government in restricting gold imports to the country is obviously reflected in the official levels of demand this quarter, but this by no means indicates that the appetite for gold in India is waning," Marcus Grubb, managing director, Investment at the World Gold Council
"We have seen some increases in demand in other countries which have close links with India, some of which may be making its way back to the country through illicit channels, which have reopened in recent quarters following a long period of inactivity," Grubb continued.
Helping to offset the fall in India's gold consumption was China – the world's largest jewelry market. Mainland consumers' appetite for gold remained robust, rising 18 percent on-year to 210 tons during the quarter.
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This was driven by consumption of gold jewelry, which reached 164 tons, 29 percent higher on year. In India, demand amounted to 105 tons in the quarter.
Beyond China, robust growth in the jewelry sector was also seen in significantly, across South East Asia as well as the Middle East and Turkey.
Central banks add gold to reserves
Central banks remained net buyers of gold for the 11th straight quarter, albeit at a slower rate. Official purchases totaled 93 tons, down 17 percent on year.
The softer pace of demand may have been driven by reduced demand for asset diversification from some central banks that have experienced a slower build up in foreign exchange reserves this year, the report said.
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Purchases were dominated by central banks within the Commonwealth of Independent States (CIS) region, with Russia remaining the most prominent. Kazakhstan, Azerbaijan and Ukraine also made regular purchases throughout the quarter.
—By CNBC's Ansuya Harjani; Follow her on Twitter:@Ansuya_H