Global Risks Bode Well For Gold

JAYALAKSHMI, a school teacher in Alleppey, Kerala, and her husband Sudeep Kumar, a private bank employee, had planned to buy a new SUV to replace their small car last Diwali. Their bank balance was around ₹1.25 lakh and they realised they would have to shell out at least ₹2-3 lakh upfront to own their dream car. Anticipating their kid’s school admission in the next academic year, it was not wise to spend the money in the bank. Instead of relying on new loans in addition to the auto loan for the new vehicle, the couple decided to sell a part of Jayalakshmi’s jewellery reserves, since gold prices were at a record high. “After discounting making charges, we got around ₹40,000 per sovereign (eight gram). We sold two bangles and a chain of about seven-eight sovereigns to raise funds,” says Sudeep.

In 2023, gold prices started to climb in and around ₹40,000-42,000 for 10-gram 24-karat gold in September, once the festival season kicked in. And with geo-political uncertainties on the rise, prices crossed ₹62,500 by November end, before softening a bit in December.

According to the World Gold Council (WGC), Indians recycled 19.3 tonnes of gold in Q3CY23, a 20% growth over last year. Despite rising prices, jewellery demand was high at ₹1,39,550 crore in terms of value, up 24% from Q3CY22 (₹1,12,330 crore). By volume, demand rose 7% year-on-year to 156 tonnes.

India’s total gold demand also increased 10% in Q3CY23 to 210 tonnes from 192 tonnes a year ago. “With demand at 481 tonnes for the first nine months, full-year gold demand is likely to be in the range of 700-750 tonnes, marginally lower than last year’s 774 tonnes,” says Somasundaram P.R., regional CEO, India, WGC.

The trend is expected to continue in the coming year as well, say experts. Factors, including global economic, political and social developments, hyperinflation and central bank monetary policies, fears of a recession, geopolitical tensions, and unprecedented central bank gold purchases are expected to give momentum to gold sales in the coming year, they add.

“On the back of the high demand, we had revenue growth of 35% in the first half of Q3 and I expect this growth momentum and demand surge to continue, at least till February 2024,” says Ramesh Kalyanaraman, executive director, Kalyan Jewellers, one of India’s leading gold retail companies.

Agrees Mangesh Chauhan, MD & CFO, Sky Gold. “Gold prices in US dollars hitting new all-time highs mark the beginning of the next phase of the gold bull market. We anticipate this trend of outperformance and positive returns to continue in 2024, given the persistent underestimation of inflation dynamics and macroeconomic uncertainties,” says Chauhan. The yellow metal’s average annual performance from 2000 to now has been upwards of 10-12%, outperforming virtually every other asset class and currency, he adds.

India, the second-largest gold market in the world, will be among the fastest-growing for the yellow metal, according to experts. IMF forecasts India’s per capita GDP growth will increase 23% between 2022 and 2026, which, along with rising income levels, augur well for gold sales in the short and long term. “Despite macroeconomic uncertainties, India’s population resolutely turns to gold. Weddings and festivals are key drivers of gold demand and the country is also one of the world’s largest markets for bars and coins,” says Juan Carlos Artigas, global head of research at WGC.

The drivers of gold demand in India are varied. Factors such as cultural affinity, long-held tradition and festive gifting play a significant role. Gold jewellery demand accounted for more than 75% of total demand for the yellow metal in India between 1990 and 2020. The rising working-age population, urbanisation leading to better living standards and increasing household incomes are driving sales. A prospering rural India and more disposable income augur well for gold sales. An analysis by Bain & Company shows the number of middle-class households is expected to grow by 140 million between 2018 and 2030, while the number of high-income earners is set to increase by 21 million, causing an almost four-fold increase in consumer spending, from $1.5 trillion in 2018 to $5.7 trillion by 2030.

WGC’s latest research report on the domestic gold market published in December throws light into India’s gold sales trends. According to the report, rising incomes have a positive effect on Indian gold demand and higher prices prove to be a dampener. Three key factors that influence consumer demand for gold in India over the long term include income, price levels and government levies. For each 1% increase in per capita gross national income, gold demand rises 0.9%, and for each 1% increase in rupee-based price of gold, demand falls 0.4%. In the short term, for one percentage point increase in inflation, gold demand rises 2.6%, and as is common with investors around the world, Indian savers turn to the yellow metal as a hedge against inflation. For each 1% fall in gold price in any given year, demand increases 1.2%.

Tax has also proved to be a driver of price movement. An increase in the rate of import duties since 2012 has hit demand for gold by 1.2% per year. Even a good monsoon can influence gold prices, especially in the rural economy. A 1% increase in monsoon rainfall above the long-run average boosts demand by 0.2%, says the WGC study.

Experts also point out that growth potential for India in domestic gold sales and exports is huge. Per capita consumption of gold in India currently ranges between 0.3 grams and 0.6 grams per person. It is lower than emerging markets in Southeast Asia such as Vietnam (0.4-0.7 grams) and West Asia, as well as developed economies such as Germany (1.2-2.0 grams) and Switzerland (3.5-6 grams). “If new export markets are developed, the current fragile platform — 90% of jewellery exports go to just five countries namely the UAE, the U.S., Hong Kong, Singapore and the U.K. — will be diluted,” says Artigas of WGC.

Policies, including mandatory hallmarking that helps curb smuggled gold, GST, plans to allow advance payments to overseas suppliers and set up mega common facility centres (CFCs) in the Santacruz Electronics Export Processing Zone (SEEPZ) in Mumbai and Surat, loans for artisans, large-scale digitisation and emergence of online trading platforms are bringing in more transparency and consumer confidence, say retailers. “The ongoing paradigm shift from unorganised to organised jewellery retailers will boost formalisation of India’s jewellery sector,” feels Kalyanaraman.

One negative in the future can be the dwindling craze among the new generation to wear gold jewellery. But experts feel otherwise. “The spike in gold prices may have prompted the new-age consumer to wear lightweight products, but this has not dampened the demand for the yellow metal,” says Chauhan of Sky Gold, pointing out that manufacturers are now making more lightweight jewellery. Plain gold jewellery has 80-85% market share, the majority of which is 22 carat, although the market for 18 carat jewellery is growing. Studded jewellery has an estimated market share of 15-20%. In the South, consumers are more inclined towards plain gold products, 60-70% of which are studded with diamonds and the remaining 30-40% set with precious or semi-precious stones.

With huge potential in the future and favourable near-term external factors, gold is likely to continue its shine in 2024 and beyond.