"Peak Indian Gold Buying"
Shailendra Kumar
One of the most striking news in gold markets during the
current month was the fall in gold imports by
What is causing the fall in imports? The simple answer is:
Indians are losing their gold buying capacity. This may come as a shocker to
most people, given the fact that these days the media - both paper and
electronic - is filled with reports about the rise of
Let us look at it another way: a great majority - about 70% -
of Indians depend on farming, a profession that is an out-and-out losing
preposition. Due to numerous factors, which are beyond the scope of this
article, the farmers are unable to make a decent living. While the cost of farm
inputs is rising due to an unprecedented boom in commodities sector, their
produce prices are controlled by the government, thus capping their profit
margins. Most farmers also have to cope with uncertain weather conditions,
given the fact that irrigation is available only to about 30% of Indian farms.
Not a surprise most of them are born in debt, live in debt, and sadly, die in
debt. Death is often not natural; more than 15000 farmers have committed
suicide during the past decade - a fact that illustrates the rural poverty in
most shocking colours.
Why farmers are important to gold? Simply because this
segment of Indian society has been traditionally a very important buyer of the
noble metal. The absence of banks and financial institutions in rural
If the imports during past many years have been reasonably
stable, it is because there has been some extra buying from middle class
Indians living in the cities. However the middle class today is fairly charmed
with paper assets, and is generally willing to shun gold at the slightest
increase in the prices. Worse, the middle class is even willing to trade its
gold possessions to convert them into paper assets, a phenomenon amply seen
during Q4, 2007 and Q1, 2008. At that time thousands of Indians sold their gold
(then around $800 an ounce), and invested the proceeds in stock markets. As
luck would have it, gold today is quoting at $975/oz. while SENSEX (the most
widely followed Indian stock index) has come down from 21,000 to 12,500 today,
thus giving an entirely new meaning to the old metaphor "killing two birds
with one stone." The sorry state is: even after such a drastic fall in
stock indices, there are few middle classers who are willing to invest in gold.
They may buy a little gold for their daughter's wedding, but let us make no
mistake, they are buying far less gold than their fathers bought during a
similar occasion.
What does the future herald? Is
Goes without saying, there is little wealth going to be
spared for purchasing gold, something that yields no interest or dividend.
(This is another matter that gold has been outperforming a whole lot of
interest bearing and dividend paying financial instruments during past six
years.) Not a surprise why even year 2007 - the most prosperous year in the
history of this nation - did not see any drastic increase in gold imports.
Keeping these facts in mind it should not be difficult to
make out that the coming years will see gold imports falling by a considerable
degree. Indians are extremely price sensitive buyers, and the days of cheap
gold are frankly over. This year gold has been already averaging above $900,
and as we go ahead from here, there is little chance that gold price will fall
drastically below this level. Since higher prices and a whole lot of turmoil in
global economy ensure higher degree of volatility, we should not be surprised
to see an increasing number of Indians refusing to visit the neighbourhood jewellery shop.
That gold is set to become even more costlier for Indian buyers (on account of
a fast depreciating rupee) should only dissuade them from buying something
their forefathers bought at every given opportunity.
Price sensitivity is a crucial factor here. In fact the
imports during 2007 itself would have been much less, had the prices not been
less than Rs. 10.000/10 grams during the first half
of the year. (It were the prices at sub-10,000 rupees per 10 gram levels in the
middle of the year that sparked off high sales of bullion and led to bullish
forecasts for imports.) In order to overcome the price sensitivity the jewellers are increasingly introducing jewellery
made of 14 and 16 carat gold against the traditionally popular 22 carat.
The sum and substance is that just as there is concept of
"Peak Oil" and "Peak Gold", there is this phenomenon of
"Peak Indian Gold Buying". And I think the peak is already behind us.
The country's highest ever imports recorded by WGC amounting to 774.4 tonnes were way back in 1998, and I don't think
This however should not be a bad news for gold investors and
gold industry in general. The international gold price will not fall because
the Indians are going to buy fewer necklaces and nose rings. The rising tide of
investment demand from around the world will be able to easily offset the fall
in Indian demand.
© Shailendra Kumar.
Shailendra Kumar
is the author of GOLD: God's Own
Currency -