By K Raveendran
The World Gold Council is reporting that India’s economic strength is yielding wealth-driven buying of gold. This is such a distinct trend that it is expected to contribute to the precious metal’s long-term performance. In China, the other major gold market, economic and geopolitical uncertainty is spurring safe haven demand for gold. The council believes there is no contradiction between the two trends.
Jewellery demand in India rose in the third quarter, the first year on year improvement since the third quarter of last year. Demand was up 7 percent to156 tonnes, which is 19 percent more than the five-year average of 130 tonnes.
During the third quarter, a correction in the local gold price from record highs, combined with the festive season in south India, were the two major drivers of growth. After a fairly soft start to the quarter – in part due to Adhik Maas, which is viewed as inauspicious for making new purchases –August and September witnessed a pick-up in activity thanks to festivals such as Onam and Varalakshmi.
Festive purchases helped south India outperform other regions. By contrast, north India was the weakest and saw a year-on-year decline, partly reflecting a weaker rural sector and a relative lack of major festivals during the quarter.
Lower-carat jewellery, such as 18 and 14 carats, has gained popularity in the face of an elevated gold price and has benefited from retailers promoting these higher-margin products. On a relative basis, large retailers have continued to perform well, reaping rewards from their aggressive marketing campaigns.
Jewellery fabrication jumped 9 percent to 199 tonnes, the highestQ3 figure since 2015. Lower gold prices, continued retail network expansion, and the anticipation of a good wedding and festive season led to this jump, with retailers stocking up in preparation.
Similarly, bar and coin investment in India reached 55 tonnes – the highest for a third quarter since 2015. Demand jumped 20 percent to end up 38 percent higher than its five-year quarterly average of 40 tonnes.
Investment has also inched ahead of the same period last year, reaching 118 tonnes as investors reacted to the downward correction in the gold price from its Q2 record high, adding to their holdings in the expectation of a price recovery in the fourth quarter as the wedding and festive season gets underway.
The economic environment remains supportive, with most macro indicators pointing towards continued momentum in economic growth. And a good 2023 monsoon bodes well for farm incomes in Q4. That said, the recent jump in oil prices poses a challenge, given India’s heavy reliance on oil imports. And the recent gold price volatility, spurred by heightened global geopolitical concerns, may also discourage some investors.
A major highlight of this year so far is that the central bank net buying is back with force this quarter, helping gold prices defy surging bond yields and a strong US dollar. After a slower second quarter, the central bank demand resumed its voracious pace, raising expectations of the annual total approaching last year’s record, and there is even an outside possibility it will exceed that figure.
Beyond the large-scale buyers, eight more banks made purchases of at least a tonne during the quarter, highlighting the breadth of demand: India (9t), Uzbekistan (7t), the Czech Republic (6t), Singapore (4t), Qatar (3t), Russia (3t), the Philippines (2t) and the Kyrgyz Republic (1t). In early August, it was reported that Russia would recommence the buying of foreign currency and gold but no further information has been forthcoming on the size or timing of any future gold purchases.
Taking stock and looking ahead, it now seems all but certain that central banks are on course for another colossal year of buying. The strength of buying has, to some degree, exceeded expectations. While the council was confident that central banks would remain net purchasers in 2022, it doubted if net buying would match the previous year’s record. But considering that buying might continue to be strong in the fourth quarter, the full year total could get closer than was anticipated. (IPA Service)