Tuesday, 05 November 2024
Tuesday, 05 November 2024
A surge in demand among Indian consumers for gold jewellery and bars, driven by an unprecedentedly large tariff cut and the festival and wedding season, has pushed global bullion prices to a string of fresh highs. The big question now is how long India’s golden bull run will last.
According to Sachin Jain, chief executive of the World Gold Council’s Indian operations, demand will “remain very strong” during the festival season.
“The quarter of October, November, and December [this year] will perhaps be one of the most significant consumption quarters that we have witnessed in a long period of time,” Jain said. "The primary beneficiaries” of the duty cut are “retail consumers,” and “the reduction in customs duty combined with the more beneficial long-term capital gains treatment for gold funds could be an important catalyst for long-term Indian gold demand,” the council says.
The Modi government slashed gold and silver import duties by a massive 9 percentage points in July, bringing the rate down to 6 per cent from 15 per cent, in a bid to curb smuggling and boost the domestic jewellery industry. The move lowered the domestic gold price by 6 per cent month-on-month, even as the dollar price of gold rose due to escalating geopolitical tensions, falling interest rates, inflation, and central bank buying.
The cheaper gold prices sparked a blistering rush for bullion, pushing August gold imports to a record $10.1 billion, up by more than 220 per cent from the previous month when gold imports totaled $3.1 billion. Last week, gold demand received another boost when the US Federal Reserve delivered a half-percentage point interest rate cut.
The rate decrease pushed gold prices to a new record high of just under $2,600 an ounce, exceeding forecasts by JP Morgan and other investment houses, which had expected gold to climb to $2,500 by the end of 2024.
“The liquidity infused by the central banks and the expectations of lower to no rate hikes are pushing gold prices up,” said Colin Shah, managing director of Kama Jewelry. “The US rate cut has opened the doors for gold to scale new highs,” he added.
Traditionally, a weaker dollar and lower US interest rates increase the appeal of bullion, while economic and geopolitical uncertainty tend to be positive drivers for gold due to its safe-haven status and reputation as a store of value.
Experts are now closely watching to see if the gold-buying momentum will hold among India’s notoriously cost-sensitive consumers, especially as prices keep climbing. The price of gold has risen by one-quarter since the start of the year. Despite the August price gains, the domestic gold price remains about 2 per cent lower than it was before the reduction in the import duty. Currently, 10 gm of 24-carat gold is priced at INR 75,000.
India ranks as the world's second-largest gold consumer, behind China. Metals Focus is sounding a cautious note, warning that the demand effects from the “unprecedented” tariff cut may be waning, with prices catching up to the levels they were at before the tariff cut. Metals Focus said, "We’ll have to see if consumers continue to buy at these [price] levels."
Still, jewellers like MK Jewels in Mumbai are optimistic, expecting a 40 per cent rise in gold sales with the bump anticipated from the September-to-February festival and wedding season. MK Jewels terms demand so far as “fantastic," with shoppers hunting for jewellery items.
A favourable monsoon season is expected to boost farmers’ income and further buttress gold demand. According to the World Gold Council, buying momentum is “healthy,” and “purchases previously deferred are now materialising.” There are expectations that “this momentum will continue,” the council says.
Beyond consumer demand, India’s central bank has also been a key driver, and its gold-buying spree is expected to continue as it, along with other central banks, seeks to diversify away from the dollar amid worries about the US debt situation.
The Reserve Bank of India added 50 tonnes of gold to its reserves in the first seven months of 2024 alone, more than double what it bought in all of last year. It sees the precious metal as a safe-haven asset in a volatile global economy. The bank now owns a record 853.6 tonnes of gold, which comprises 9 per cent of its foreign reserves, up from 7.5 per cent a year ago.
India accounted for a third of gold jewellery demand last year and is the world’s second-largest bar and coin market, according to the World Gold Council, an industry body. Meanwhile, China, the world’s biggest gold buyer, is seeing a different story, with fewer jewellery sales but a 62 per cent climb in gold bar and coin sales in the second quarter. Sprott Asset Management says gold remains a popular choice for savings in Asia as it’s “readily convertible into currency.”
