Indian Gold Market Charts Another Healthy Month in September

The recovery in the Indian gold market remained on track in September with strong imports and investment demand.

India imported 89.5 tons of gold in September, according to the latest data from the World Gold Council. While that was down 21% from the five-month high we saw in August, it was still far above the import totals in September 2020 as the response to COVID-19 ravaged the Indian economy. It was also significantly above import totals in September 2019 — prior to the coronavirus pandemic.

India’s gold imports through the first nine months of 2021 tripled to 777 tonnes compared to 2020. Imports over the last three months are ahead of the same period in 2019, before the pandemic.

Retail demand softened slightly in September leading up to the inauspicious period of Pitru Paksha. This marks the beginning of the waning phase of the lunar cycle and is a period where Indians perform various rituals to pay respect for the dead. Gold demand typically drops this time of year. According to the World Gold Council, retail demand in October is expected to be robust based on anecdotal evidence of brisk sales during Dussehra.

A sharp increase in the customs tariff in September raised the cost of gold imports despite a decline in the international price of gold. That also created some headwinds for Indian gold imports. Nevertheless, gold imports continue to show a healthy recovery from the past two years. According to Reuters, “Higher imports by the world’s second-biggest bullion consumer could support benchmark gold prices.”

Investment demand for gold in India remains strong in the midst of heightened stock market volatility. Indian Gold-backed ETFs saw gold inflows of 1.1 tons in September. Total gold holdings in Indian ETFs stood at 35.1 tons at the end of September. That’s the highest total since Q2 2012.

Meanwhile, the Reserve Bank of India continues to add to its gold holdings. After purchasing 13.9 tons of gold in August the Indian central bank ramped up its gold purchases and bought an additional 19.7 tons in September, increasing its total gold reserves to 744.8 tons. Gold now makes up 6.5% of India’s total reserves. The monthly purchase in September was the highest since the RBI started buying gold consistently in December 2017.

Rainfall during the monsoon season ended within the normal range for the third straight year. This is good news for farmers and a positive for the gold market. A normal monsoon season generally means a good year for farmers. Farmers with money in their pockets generally buy gold.

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 early in Q2, but it appears to be regaining steam with strong retail demand and a surge in gold imports.

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

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.