As COVID Wave Eases Indian Gold Market Recovery Looks to Be Back on Track

After being put on pause due to a coronavirus surge, the recovery of India’s gold market appears to be back on track.

India ranks as the second-largest gold-consuming country in the world, second only behind China, but the gold market has languished over the last couple of years. The pandemic crushed demand, particularly for gold jewelry. But even before coronavirus, record-high gold prices in rupee terms and government policy put a drag on the gold market. There were signs of a turnaround late last year and it continued through the first quarter of 2021. The second COVID-19 wave stalled the gold market’s recovery in India, but it appears to be regaining steam with growing retail demand and a surge in gold imports.

Official gold imports into India totaled 72.3 tons in July. That was more than double the 29.7 tons imported in July 2020. Month on month, gold imports were up 357.6% from just 15.8 tons in June.

July’s gold imports were also above the 5-year average.

An analyst at the World Gold Council said he expects official Indian gold imports to remain healthy in August.

The correction in the gold price during the month has revived retail demand in India and this may create a tailwind for gold imports.”

With the COVID-19 surge easing and the economy opening back up, retail demand for gold was up in July, particularly early in the month. That helped drive the increase in imports.

Indian states began relaxing lockdown measures in mid-June.  Wedding purchases helped drive strong demand early in July. Demand eased somewhat later in the month primarily due to a lack of wedding dates.

Large organized retailers with a national presence reported a stronger recovery in demand from metro areas. Cities were significantly impacted by government measures implemented during the first wave of the pandemic last year.

According to the World Gold Council, retail demand is projected to remain healthy in August. There was a 2.4% correction in the domestic gold price on Aug. 9 that created a good buying opportunity. Festivals such as Raksha Bandhan and Onam may provide a further boost to retail demand.

Meanwhile, the Indian central bank continued adding gold to its reserves in July. The RBI purchased an additional 5.6 tons of gold last month. That followed on the heels of a 9.4-ton purchase in June.  It was the first big Indian buy since March. Last August, there were reports that the Reserve Bank of India (RBI) was considering significantly raising its gold reserves. India has added 34.5 tons of gold since the beginning of the year.

The weather also looks good for gold. After a lull, the monsoon season ramped up again with cumulative rainfall between June and July 1% above the long-period average (LPA). A good monsoon season typically means a good growing season for farmers. And when rural Indians have money in their pockets, they buy gold.

Indians traditionally buy and hold gold. Collectively, Indian households own an estimated 25,000 tons of gold and that number may be higher given the large black market in the country. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system.

Gold is not just a luxury in India. Even poor people buy gold in the Asian nation. According to an ICE 360 survey in 2018, one in every two households in India purchased gold within the last five years. Overall, 87% of households in the country own some amount of the yellow metal. Even households at the lowest income levels in India own some gold. According to the survey, more than 75% of families in the bottom 10% had managed to buy gold.

Gold served as a lifeline for many Indians during the pandemic.

The Indian government’s response to the first wave of COVID-19 ravaged the economy. As a result, many banks were reluctant to extend credit due to fear of defaults. In this tight lending environment, many Indians used their stashes of gold to secure loans. As Indians battled the second wave of COVID-19, many Indians sold gold outright in order to make ends meet.

Indians understand that gold tends to store value and that ultimately gold is money. If they have gold, they know they will be able to get the goods and services they need – even in the event of an economic meltdown. And while westerners may not embrace the cultural and religious aspects of the Indian love affair with gold, the economic reasons for their devotion to the yellow metal are every bit as applicable in places like the US.