“Indian Monsoon and Gold”

Shailendra Kumar

July 28, 2008

The Indian summer is long and relentless. It exhausts the body, brings rivulets of sweat, and often leads to severe sunstroke resulting in death. The sensation of suffocating heat in the atmosphere simultaneously oppresses the lungs and dissipates the spirits. But as even the most pronounced bull run in the market comes to an end eventually, the heat also loses its potency, and gradually a prolonged and punishing summer attracts new elements in the sky: the clouds. A visible mass of droplets rise from the horizon and begin to dissipate in a thin and almost imperceptible vapour over the sky fast turning gray. Perceptibly, the horizon gathers blackness, and the sun finds its glory diminishing, until it begins to go down in darkness. With sun's splendour veiled from human sight by a long gloomy period of storm and turbulence, the masses of heavy clouds begin to appear far more frequently, and come howling over the southern coast of India. As the days pass, the portentous bodies of water continue to roll over the peninsular India and then gradually envelop the entire landscape with a general hue of sickly grey, rendering the air damp and chilly.

Apart from the wondrous play of raw elements of nature, the monsoon also means absolute sustenance for more than two-thirds of Indian population. During the normal duration of monsoon - roughly 100 days beginning from 1st June - about 75,000 million tonnes of water vapour are transported across the west coast of India every day. Out of which a third, or 25000 mt is converted into rain every day, bringing joy to the farmers. Monsoon means singing crops. It guarantees the food for the rest of the year. It means extra income. It means trouble-free education for the children for yet another year. Finally it also means farmers buying gold.

If you look at the gold buying calendar in India, you will find it strikingly matching with agriculture harvest season. Most of India's auspicious days for buying gold fall after the monsoon rains are over and the crops have been harvested. Gurupushyamrit, Dussehra festival, Pushya Nakshatra Day, Dhanteras (the most auspicious day for buying gold), Deepawali, and a couple of Pushya Nakshatras fall after the middle of September, the month that sees the ripening of the crops. The gold jewellery industry in India operates in sync with these dates, planning inventories, stocking up the bullion, and of course, launching their hardsell promos.

But these days the monsoons are erratic. Rains are often delayed; sometimes the showers come, but not at the frequency desired by the crops at various stages of growth. Consequently the farmers - particularly those who depend solely on farm income - hardly ever earn any profits. There are farmers who in spite of owning big patches of farm land still continue to live in debt simply because there is no water to irrigate the crops. This reduces their capacity to save, something that involves the purchase of gold.

What's the situation this year? Nothing much to sing about. At the time of writing this, the all-India rainfall has fallen into deficit as per updated India Meteorological Department (IMD) statistics until July 23. Deficient rainfall in 13 out of the 36 meteorological divisions of the country is likely to affect the prospects of kharif crops in Assam, Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu. Peninsular India has hit new lows in recorded rainfall. Take a drive through the countryside and you see strings of unsown farms on either side of the road. Bare earth shows up everywhere instead of lush greenery that is the norm during this period. A whole lot of crops like ragi, moong, groundnut, sunflower, sesamum and castor are already affected. With Gujarat receiving deficient rainfall, groundnut and castor crops face problems. The situation with regard to other crops such as bajra, maize and rice seem to be currently under control, though their vulnerability has increased during the last two weeks. Pulses production is likely to be the biggest casualty of the extended dry spell across various pulse-growing states. Oilseeds production has also taken a huge hit already, with the oilseeds crop likely to be down by about a whopping two million tonnes. All this is likely to translate only one way: slimmer wallets for the farmers.

What does it mean for the gold trade? Nothing but lower sales. Though the latest European Centre for Medium-Range Weather Forecasts (ECMWF) forecast indicates positive rain anomalies for southeast and southwest Bay of Bengal, the west coast and west-central peninsula during the coming three months, the worrylines on farmers' faces have already been itched. Even if the monsoon was to revive from here, the best crops cannot be expected. Goes without saying, the farmers are unlikely to be passionate about their gold purchases.

Already the Indian gold imports have seen a superb decline during the first half of this year. (India imported 139 tonnes of gold in the first half of the current year, down 67 percent from a year ago.) Monthly stats have not been bringing much cheer either. Imports declined by a whopping 59 percent year-on-year in May, as high prices dented demand for the yellow metal in the world's largest consuming nation. (The country imported less than half the quantity of the yellow metal compared with 69 tonnes a year earlier.) The next month witnessed an even bigger decline. India's June gold imports fell by 68 percent from a year earlier as high prices yet again eroded demand from jewelers and investors. (Purchases declined to 24 metric tons from 74 tonnes.)

This fall in demand for gold jewellery in India April-June this year has led to a 21 per cent drop in the global market. According to the latest quarterly report by WGC (World Gold Council), "The 121.5 tons decrease in global jewellery demand was largely attributable to a sharp drop in demand in the Indian market, which was almost 70 tons below year earlier levels." The report simultaneously mentions that India also accounted for the 35 per cent year-on-year decline in retail investment for the first three months this year to 72.7 tonnes.

The sum and substance: the absence of dark clouds over Indian skies is throwing a pall of gloom on world's largest and most diversified jewellery industry, which in turn is likely to consume much lesser gold.

© Shailendra Kumar.

Shailendra Kumar is the author of GOLD: God's Own Currency - India's first book on gold investments. He also heads Commodity Research Group, a research and advisory company based in Mumbai, India. He can be reached at NothingBeatsGold@gmail.com