Is India’s Golden Age About To Disappear?

A country’s demand for gold is something which fascinates me. Coming from a country where the need to hold gold is not as embedded in our culture as others, I find it interesting when I read about a country which has such a desire for gold, the gold market is literally hanging on waiting for it to do something in order to impact the price.

There is little question that both the gold and silver price have received an upward boost since the announcement of QE3. However, for some this boost has been somewhat muted. Considering that, for the majority of the summer, the gold price seemed to be at the beck and call of central bankers’ speeches and policy announcements, it is understandable if some investors in gold bullion believe that the gold price only has potential where quantitative easing measures are concerned.

However, around this time of year analyst start turning their attentions to the East where gold’s biggest fans await with big orders for gold as part of the wedding and festival season. Some, therefore, are predicting China and India’s seasonal demand to be the final spark to the rocket which will propel gold over $2,000/oz.

Focussing on India, some are wondering if the markets will be disappointed. Thanks to the rupees’ weakening against the US dollar, gold has remained very expensive, despite its poor performance in the first half of the year. Add to this increasing inflation, currency weakness, monsoons and slow economic growth, and demand for gold by the precious metals’ biggest consumer has not lived up to promise this year.

However, there seems be mixed evidence supporting the worry that these factors will impact India’s gold demand.

Official figures
In August the World Gold Council’s India office reported that jewellery, bar and coin demand were each down in the second quarter of the year, by 30% and 51% respectively. Overall consumer demand was down 38%. Analysts are expecting to see an overall decrease of 184 tonnes of gold imports for the year 2012, assuming performance remains the same in H2 as it did in H1.

Gold coin and bar demand, as well as exchange-traded products, are likely to suffer the most thanks to new regulatory hurdles. Currently these types of investment represent about 31% of demand, but this is expected to fall to 25% by the end of the year.

Government’s legal confiscation
Back in July, we wrote about the Indian governments’ attempts to restrict gold investment in the world’s second most populous country. We explained how the government had continued to bring in measures to persuade people to save in cash rather than importing gold. The government were worried about the pressure these gold imports were placing on the country’s current account deficit.

The Prime Minister’s Economic Advisory Council have said that they expect to see gold imports come down further in the next year as inflation concerns cool down following a better than expected monsoon season. Earlier this month the government said they were expecting to see the current account deficit for 2012-2013 to come down from 4.2% of GDP to 3.5% of GDP.

The gold bond schemes offered earlier in the year to those with unaccounted holdings have, unsurprisingly, failed to receive much uptake. The hope was individuals would see the gold bonds as an opportunity the channel the asset into more productive investments rather than hold physical.

Whether the fall in gold imports is thanks to new government measures in unclear, particularly as the weak rupee made gold extremely expensive.

Earlier this month the Bombay Bullion Association reported that the government may look at raising the import duty on gold for a third time this year to 7.5%. Analysts are concerned that this may deter gold shoppers as the wedding and festival season gets underway.

Just last week, the Reserve Bank of India (RBI) stated that it would look into offering financial products in gold without investors having to physically hold it, in order to reduce pressure on gold imports further. The Prime Minister said last week that he hoped such products would slowdown the number of people who were importing gold as a hedge against inflation.

Jewellery demand
As we said above, the festival and wedding season is starting to get underway in India, so many are asking if we are about to see a rally in the gold price. Gold imports have begun to increase, but this has happened but only in small quantities. On the 13th September, the gold price hit a record rupee high. However in the last week or so the rupee has strengthened against the dollar, bringing the yellow metal down to a 3 week low.

For jewellery, the WGC said back in August that they expected the worst to be over as we approach the wedding season. Halfway through September, jewellery sellers reported a 20% increase in sales as wedding season demand buoyed the market.

Sellers also believe the market is improving again back on the speculation that the gold price will rise even further, prompting ‘bargain buying’ now. Gold coin sales are also back on the up, with footfall reported to be back up to 2011 levels.

Golden technology revolution
The love for gold and silver is something which can now be satisfied in a new mobile app, launched earlier this month. Shivom Seth, reported on the launch of the "Muthoot group of apps" which will not only offer daily rates of precious metal prices but also enable the user to buy gold and silver coins.

The app market in India is estimated to be worth around $17.5 billion by the end of 2012. Combining two hugely popular areas of interest – apps and gold, the gold market is able to develop along with technology, preventing the precious metals from becoming viewed as desolate and archaic as they so often are in the West.

Sustainable long-term demand
The government may well be working hard to dissuade gold investment but it seems they will have a long losing battle to fight. Over the summer, the country saw an unprecedented increase in the number of undeclared gold being smuggled into the country, with smuggled gold increasing ten-fold since the increase in import-duty.

Over the next 15 years, India’s middle-class is expected to grow from 5% to 20% of the population, turning India into the world’s 5th-largest consumer. Gold is an important sign of wealth for the Indian population who have so far failed to be captivated by the economists who tell us our wealth would be much better in the form of cash in the bank or some other made up form of investment.

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.