Indian Gold Market Continues to Bounce Back

The bounceback in the Indian gold market continued last month.

Indian gold imports hit a 21-month high in February and there was robust retail demand.

This comes on the heels of a 72% year-on-year increase in gold imports in January.

India ranks as the second-largest gold-consuming country in the world, second only behind China. But over the last couple of years, the gold market in India has languished. The pandemic crushed demand, particularly for gold jewelry, but record-high gold prices in rupee terms and government policy put a drag on the gold market even before COVID-19.

There were signs of a turnaround late last year and it continued through the first two months of 2021.

Official gold imports into India came in at 91 tons in February. That was a 103% increase year-on-year. Gold imports were up 36.5% month-on-month.

According to the World Gold Council, robust retail demand driven by the lower gold price and wedding demand, along with re-stocking by jewelry manufacturers and retailers, drove official imports during the month.

There were other healthy signs for the Indian gold market last month.

Inflows of gold into Indian ETFs were up last month as well.  Total Indian gold ETF holding reached 30.2 tons by the end of February; a net inflow of 1.1 tons. As the WGC put it, “the lower domestic gold price provided a welcome entry point for investors.”

Meanwhile, the Reserve Bank of India added 11.2 tons to its holdings, bringing its total gold reserves to 687.8 tons. It was the highest monthly buying total on record. Last August, there were reports that the board of the Reserve Bank of India (RBI) was considering significantly raising its gold reserves.

As we reported last month, some policy shifts recently announced by the Indian government in its Union Budget will likely have a positive impact on the country’s gold market. These include a reduction in the gold import duty, some regulatory changes, and income-boosting welfare schemes for rural Indians.

A further recovery in the Indian gold market would further boost global demand and would be supportive of gold prices.

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.

While consumer demand for gold was hit hard by the pandemic, gold has helped Indians weather the economic storm caused by the coronavirus. The government response to COVID-19 ravaged the Indian 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.

For many Indians, gold is a lifesaver, providing liquidity that they otherwise wouldn’t have.

Indians understand that gold tends to store value, and that in the end, 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.