Indian Gold Market Continues to Show Signs of Revival

Last month, we reported on signs of revival in the Indian gold market. Gold imports hit a 19-month high in December.

That revival has continued into 2021. Gold imports in January were up 72% year-on-year, and some shifts in government policy could give demand another shot in the arm.

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 month of 2021.

India imported 62 tons of gold in January, according to an anonymous government source who spoke to Reuters. That was up from just 36.5 tons in January 2020. In dollar terms, January gold imports came in at $4.04 billion compared to $1.58 billion a year ago.

Indian gold imports should get another boost thanks to a cut in import duties announced last week by Finance Minister Nirmala Sitharaman. Beginning Feb. 1, the duty on gold bars will drop from 12.5% to 7.5%. Consumers will pay 14.07% tax for refined gold compared to 16.26% previously. Analysts at the World Gold Council project the cut in import taxes could boost demand by as much as 13 tons in 2021.

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.