Indian Gold Demand

It’s hard to over-egg the importance of Indian jewelry demand in the physical gold market.

Between 2000 and 2007, gold jewelry sold in India accounted for one ounce-in-nine sold worldwide. One ounce in every five wound up as an Indian import (its domestic mines produce less than six tons per year), ready to be hung off young brides as 24-carat dowries or worked into bracelets and necklaces for the international market.

The single-largest gold bullion consumer, India’s own final demand outweighed the next largest market — China — by almost 57%.

But Chinese gold buyers have now caught up in 2008. Or so says the latest data from the World Gold Council. The switch isn’t only due to surging Chinese demand (up by 15% year-on-year between Jan. and April). It comes because Indian gold sales have collapsed — down 65% in the first six months of 2008 from ‘07 according to the Bombay Bullion Association — as consumers balk at record high prices:


Our best guesstimate — working off the data provided by our friends at Virtual Metals in London — says Indian gold demand this year could be on track to fall as low as 250 tons, well below half the average of 2000-2007.

What might this mean for world gold prices? Four caveats apply:

  • Diwali — the Hindu religion’s festival of lights — falls in October after the harvest ends (more on this below). It marks India’s peak gold-buying period.
  • The drop in world jewelry sales led by Indian consumers comes in terms of physical tonnage; the dollar value of world purchases actually jumped by 20% between Jan. and April compared with last year.
  • Global investment demand continues to surge, with turnover doubling for U.K. gold dealers and new purchases rising sharply (both by volume and value) across Southeast Asia and the Middle East.
  • India’s private citizenry is no different from the rest of the planet right now, in that they can’t move for strong reasons to keep buying gold.

Strong reasons to buy gold? First, just like everywhere else, India suffers the problem of money. Much too much money.

The quantity of Rupees in circulation has more than doubled since 2003. So-called “broad money” supplies (M3) have risen 10 times over since the start of the 1990s. That makes each Rupee in your pocket worth less every day. Inflation in the cost of living is now running above 11% year-on-year, more than twice the Reserve Bank of India’s target.

But even with interest rates set at a six-year high, the real returns paid to cash — the real rate of interest after inflation — remains sharply negative for Indian savers, way down at minus 3.4% annually. That’s even worse than the negative real rates now paid to U.S. cash holders (minus 3.0%).

The Rupee’s steady decline on the currency markets therefore looks set to roll on. It’s steadily sunk against pretty much everything else over the last four decades…clawing back 15% of its value against the U.S. dollar since late 2002 only because the Dollar has fallen still faster.

Plus, the Bombay stock market has proved a great place to lose money so far this year, down almost 30% since reaching an all-time peak at the beginning of January, the worst performance of the four “BRIC” economies (Brazil, Russia, India & China) in 2008 to date.

Indeed, “if you had invested 10,000 Rupees in the Sensex or the Nifty [stock index] one year back,” write Gaurav Pai & Ashish Rukhaiyar in the Economic Times, “your investment would have shrunk to about Rs 8,800.

“However a similar amount invested in gold would have grown to over Rs 15,000.”

“It’s the uncertainty in the financial markets that is propelling gold upwards,” as Devendra Nevgi, head of the Quantum Gold Fund says from Mumbai. Indian and Western investors alike might want to keep that in mind. Because, whatever the aesthetic or festive attractions of owning gold bullion, its role as the No.1 safe-haven asset remains.

“Despite India’s emerging middle class,” wrote Laila Manji in Virtual Metals’ Yellow Book of May 2007, “the rural poor account for two-thirds of annual gold purchases. Small-scale farmers have traditionally used spare cash to invest in small pieces of gold jewelry because, in the face of economic and political uncertainty, they favor gold above paper assets.”

That’s why the vast bulk of jewelry sold in India doesn’t fit Western ideals of fine metal-work. Heavy bracelets and “marriage necklaces” weighing up to half-a-kilo (15 ounces) or more are often stringed together using 10-tola bars — smooth, round nuggets of gold each weighing 3.75 ounces (117g).

Ten-tola bars are heavily traded across India, Pakistan, Singapore and the Middle East. More than two million nuggets of this “TT” gold are believed to be cast or minted each year. “Practically, its portability makes it easier to keep safe and secure than cash,” Manji goes on, “and — even if they overcame their suspicions of paper assets such as equities or government bonds — most of India’s rural population either lack sufficient capital or access to banks to make that feasible.

“Much of India’s informal credit system is backed by gold, and, of course, religious and cultural attachments, not least the idea that gold given to women as a wedding gift remains her own property, are strong.”

Put another way, it’s crucial to grasp just how the vast bulk of gold jewelry buying in India — and across south-east Asia — qualifies as “investing” rather than “for adornment.” Farmers put their post-monsoon profits into gold because they don’t trust the Rupee to hold value (and rightly so). Families hold bullion in the form of rough, heavy jewelry, selling small pieces when needed but laying down savings for wedding dowries, local investment or property purchases. And even as the un-banked sector of India’s population slowly begins to shrink, fully 61% of adults in rural India still don’t have a bank account. Some 40% of urban citizens are without formal banking, too.

This doesn’t guarantee a sudden return of strong Indian buying, of course. But it does help explain a big difference between Indian investors and Western gold-buyers in how they respond to moves in the gold price:


“India is a market well known for its price sensitivity,” notes the latest Gold Investment Digest from Natalie Dempster at the World Gold Council.

In particular — as a comparison of volatility and gold consumption soon shows — India’s gold buyers just hate increasing their holdings when the price keeps jumping around.

Total demand recovered a four-year high in 2005 as price volatility ebbed. It picked up again after slumping in 2006, rising 4.5% last year as the violence in daily price movements slowed.

Most crucially — and most unlike Western investors buying any bull market (be it shares, real estate or government bonds) — Indian gold owners like to buy on the dips, rather than piling in whenever the price moves higher. That’s why, all through this decade’s 225% rise in the Rupee gold price, the floor for new buying has quietly moved higher.

And why ever not? Buying low, selling high is the way to make money. And analysis from the Quantum Funds in Mumbai notes that, during this bull market so far, buying gold in mid-summer has delivered an average 15% gain for Indian investors by the following New Year.

Adrian Ash
August 1, 2008