Focus on Fundamentals: Indian Gold Demand Expected to Surge in Second Half of 2018

Analysts expect demand for gold in India to surge in the second half of the year thanks to a good outlook for farmers.

A good start to the rainy season along with higher minimum support (MSP) for summer crops should boost the gold trade, according to a report in the Economic Times of India. Analysts expect a 25% increase in gold demand compared to the second half of last year.

India ranks second in the world in gold consumption and about 60% of that demand comes from rural areas. A good growing season means more money in farmers’ pockets. And when rural Indians have money in their pockets, they tend to buy gold.

All India Gem and Jewellery Trade Federation chairman Nitin Khandelwal told the ET that there have been good rains across the entire country and this bodes well for the harvest. He expects gold demand to pick up from Aug. 15 as long as excessive rains don’t damage crops. He also said the higher MSP will increase cash in hand among farmers.

The MSP is an Indian price support system. The government will buy crops at a set price, even if the market price drops below it. The Indian government raised the MSP of 14 summer crops for the 2018-2019 growing season. We can debate the economic wisdom of government price supports, but it will undeniably put more cash in the hands of Indian farmers and that bodes well for gold demand.

Indian gold consumption was tepid in the first half of this year. Khandelwal said demand has been particularly soft in the high net-worth category and the agrarian sector. “There is steady buying of gold by middle-class families mostly for wedding purpose,” he said.

The yellow metal is interwoven into India’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 last year, 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.

Indians consume between 800 and 900 tons of gold annually. Only the Chinese buy more gold. Because of its appetite for the yellow metal, Indian gold demand has an impact on the global market.

The World Gold Council listed economic growth, particularly in India and China as one of three macro trends it sees as bullish for the gold market in the coming months. According to the 2018 World Economic League Table, India will leapfrog France and England in 2018 to become the world’s fifth largest economy in dollar terms.

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Photo by CIAT