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LAWRIE WILLIAMS: Indian gold demand v. strong, but still not No. 1

For many years India was comfortably the world’s largest consumer of gold until it was overtaken by China in 2013.  China has remained unquestionably the world’s No. 1 gold consumer since then.  Now, though, a strong pickup in Indian gold imports, coupled with an apparent slowdown in Chinese consumption, looks to be narrowing the gap, although probably still  not sufficiently so for India to regain its world top gold consumer position.

The world’s two most populous nations both have a major historical cultural affinity for gold as a store of wealth.  It is thus an important element in gifting – particularly in association with weddings and key festivals. 

India in particular has an important wedding season late in the calendar year when marital union is considered particularly auspicious and this season also coincides with some of the country’s biggest festivals – notably the succession of festival days around Diwali (the Hindu Festival of Lights) which falls this year at the beginning of November.  It is probably the most celebrated of all Indian festivals on the subcontinent and with the Indian diaspora worldwide.

Diwali takes place each year after the conclusion of harvest and to coincide with the new moon between mid-October and mid-November.  According to the inews.co.uk website, the festival symbolises the spiritual “victory of light over darkness, good over evil, and knowledge over ignorance”.  It is widely associated with the Goddess Lakshmi, who symbolises three virtues: wealth and prosperity, fertility and abundant crops, as well as good fortune.  

Key Diwali dates for the five days of festivals this year are: Dhanteras: 2nd November; Choti Diwali: 3 November; Diwali: 4 November; Padwa: 5 November; Bhai Duj: 6 November. 

The five-day festival begins with Dhanteras, and gold plays a key role in its story. According to Indian mythology, King Hima’s son was saved from a death by snakebite thanks to a large distracting pile of gold at the family’s door. This legend has inspired a tradition of buying gold on Dhanteras to ensure good luck.  Lakshmi, the Hindu Goddess of Fortune and Prosperity, is particularly associated with Diwali and is also said to be closely associated with gold.  India tends to be a price-sensitive market for gold and the lower metal price of late will have also boosted demand by making it more attractive to dealers ahead of the wedding/festival season and to gifting during it.

In China the biggest upcoming gift-giving festival is the Chinese New Year which falls on Tuesday, February 1st, 2022, and celebrations culminate with the Lantern Festival on February 15th.  Celebrations last up to 16 days, but only the first 7 days are considered a public holiday (February 1st–7th, 2022).  Consequently Chinese demand tends to be stronger as the New Year approaches, although the Golden Week holiday which started this past weekend, tends to impact Shanghai Gold Exchange {SGE) withdrawals negatively at the beginning of October each year.  We consider the SGE gold withdrawal figures as somewhat synonymous with Chinese gold consumption – both physical and financial, however, and these passed the 1,000 tonne mark in August which will already be just about sufficient to top even an increased level of annual Indian consumption.

In terms of Indian gold imports these have been running at high levels in recent months and, according to a report, September was no exception with imports of 91 tonnes of gold.  China’s gold consumption, although up on a year ago, are still running substantially lower than pre-COVID levels, but as noted above will still come out ahead of India this year.  Between them these two top gold consuming nations will absorb perhaps 2,500 tonnes of the yellow metal this year, thus accounting for comfortably over 60% of annual new mined gold output by themselves.  Indeed with Indian consumption remaining strong it would not be too surprising if they consume over 70% of new gold production which bodes reasonably well for global supply/demand fundamentals.

This big pickup in Asian demand for gold, after COVID-affected 2020, comes at a very opportune time.  The gold price has been much weaker of late, after hitting a new record price of over $2,000 in August last year.  The putative U.S. economic recovery and the prospect of the Fed tapering its bond purchasing programme, perhaps later this year, and starting to raise interest rates in 2022 or 2023, had caused gold to underperform expectations so far.  However any interruption or delay in the Fed’s normalisation programmes, which now looks to be a distinct possibility, could cause this situation to reverse. The latest statements from Treasury Secretary Janet Yellen, and Fed Chair Jerome Powell do add a degree of doubt to the flagged Fed programme.  We would thus suspect that the combination of high Asian demand – even if off that of its peak years – coupled with a possible slowing down of the Fed’s economic recovery programme, should add strength to the gold price performance over the remainder of the year.  It probably won’t be sufficient to drive the price back up to its $2,000 peak though, but it could well get back to close to $1,900 or above by Christmas. 

The gold price has been particularly affected both down and up by U.S. data releases and we would expect that to continue for the foreseeable future.  A big equity market crash cannot be ruled out as many stocks appear overvalued relative to corporate profits and if this happens it could also be short term negative for precious metals prices brought down by liquidity issues.  Conversely that could also be longer term hugely positive for gold in particular,  as it re-asserts itself as the pre-eminent safe haven investment.  Perception is everything in these abnormal markets.

05 Oct 2021 | Categories: Gold, China, India, FOMC

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