WHY IN­DI­ANS ARE HOLD­ING BACK ON BIG GOLD PUR­CHASES

▶ A sub­dued econ­omy is also damp­en­ing the fes­tive spirit, Rebecca Bund­hun re­ports from Mumbai

The National - News - - BUSINESS IN DEPTH -

Busi­ness should be brisk for Mumbai jew­eller Anil Jain. With the wed­ding sea­son un­der way, it is a peak time for buy­ing gold in In­dia. But his sales are half of what they were last year. “The prices have in­creased and the whole econ­omy is not per­form­ing well,” says Mr Jain. “It’s sub­dued.”

In In­dia, which is the world’s sec­ond-largest con­sumer of gold af­ter China, the pre­cious metal has deep cul­tural and tra­di­tional roots. But that has not stopped it from los­ing some of its shine in re­cent months amid a chal­leng­ing back­drop.

The World Gold Coun­cil fore­casts the coun­try’s gold de­mand this year will fall to its low­est level in three years. De­mand for the yel­low metal in the three months to the end of Septem­ber was down 32 per cent to 123.9 tonnes, com­pared to the over­all third quar­ter de­mand for 2018, its data on In­dia shows.

So­ma­sun­daram PR, man­ag­ing di­rec­tor In­dia at WGC, says this is due to “weak con­sumer sen­ti­ment and high prices”.

Seen as a safe haven, gold prices have risen amid con­cerns about the global econ­omy. Prices in In­dia are hov­er­ing sky-high at around 39,000 ru­pees (Dh1,996) in In­dia, up more than 20 per cent com­pared to a year ago.

On top of this, the WGC cites heavy rains dur­ing this year’s mon­soon sea­son as a fac­tor in de­mand weak­ness. The rains wiped out crops, mean­ing many farm­ers took a hit to their earn­ings, lead­ing to a de­cline in the ap­petite for gold among the ru­ral pop­u­la­tion.

In­dia re­ceived its high­est lev­els of mon­soon rain­fall in 25 years this sea­son, which started in June and lasted for four months. Most of In­dia’s gold de­mand comes from ru­ral ar­eas, where the ma­jor­ity of the coun­try’s pop­u­la­tion still re­side, and where peo­ple of­ten store their wealth in gold as an al­ter­na­tive to banks.

“Gold prices in­creased sharply in a short time frame, thereby de­ter­ring con­sumers,” says Arvind Sa­hay, chair­man of the In­dia Gold Pol­icy Cen­tre at the In­dian In­sti­tute of Man­age­ment Ahmedabad, which con­ducts re­search on the coun­try’s gold in­dus­try. “The slow­down in eco­nomic ac­tiv­ity has added to the weak sen­ti­ment.”

This is de­spite the fact that In­dia has been cel­e­brat­ing fes­ti­vals, in par­tic­u­lar Di­wali last month, which is a pop­u­lar time to pur­chase gold. In­dia’s wed­ding sea­son has also be­gun, which usu­ally leads to a gold-buy­ing rush in the coun­try, with jew­ellery con­sid­ered es­sen­tial to lav­ish mar­riage cel­e­bra­tions that span across sev­eral days. The yel­low metal is be­lieved to bring good for­tune and is a way to show off wealth, and also an es­sen­tial part of the dowry sys­tem, which is still widely prac­tised in the coun­try de­spite hav­ing been banned.

Ketan Chok­shi of the jew­ellery brand Narayan Jew­ellers, based in Vado­dara in the western In­dian state of Gu­jarat, says “In­dia still has a rit­ual value for buy­ing gold”.

“It’s con­sid­ered to be aus­pi­cious to buy gold and es­pe­cially dur­ing wed­dings in In­dia,” he says.

“You can’t imag­ine an In­dian wed­ding with­out gold.”

He says “peo­ple still be­lieve it has an in­vest­ment value” and want to buy the pre­cious metal. But con­sumers are re­duc­ing the value of their pur­chases in the cur­rent eco­nomic cli­mate, Mr Chok­shi says.

In­dia’s gross do­mes­tic prod­uct growth fell to a more than six-year low of 5 per cent in the April to June quar­ter, and with the lat­est quar­terly data due to be re­leased later this month, an­a­lysts are pre­dict­ing that growth may have fallen even more – which does not bode well for gold de­mand. “We don’t think the mar­ket is go­ing to come back to nor­mal for a least an­other three to six months,” says Mr Chok­shi.

Mr Sa­hay be­lieves the down­turn could be even more pro­longed.

“As the prices are go­ing to re­main firm [for a] longer pe­riod it might take a year or two when con­sumers get com­fort­able,” he says.

Given the high prices and weak sen­ti­ment sur­round­ing the econ­omy, an­a­lysts say that many peo­ple are opt­ing to sell off their gold at this point in time.

“There’s been some sell­ing in gold which is re­flected in the in­creased sup­ply of scrap gold in do­mes­tic mar­kets,” says Rahul Agar­wal, a di­rec­tor at Wealth Dis­cov­ery, a fi­nan­cial ser­vices com­pany based in New Delhi. “In­di­vid­u­als who had bought gold for in­vest­ment pur­poses have in­deed used the re­cent spike in gold prices to book some prof­its.”

The amount of scrap gold en­ter­ing sup­ply in In­dia in­creased by 59 per cent to 36.5 tonnes dur­ing the third quar­ter, WGC fig­ures show. And with In­dia fac­ing liq­uid­ity is­sues due to chal­lenges in the non-bank­ing fi­nan­cial sec­tor, com­pa­nies that pro­vide loans against gold are ben­e­fit­ing as peo­ple use their stash of the pre­cious metal to se­cure cash loans.

“Most gold loan cus­tomers are mar­ginal bor­row­ers, un­served by tra­di­tional bank­ing,” says Jayesh Kumar, chief econ­o­mist at Manap­pu­ram Fi­nance, a gold loan provider in Ker­ala. “Their de­mand for gold loan is pri­mar­ily driven by the need for credit. In our re­cently an­nounced re­sult for the June to Septem­ber quar­ter, we re­ported a 14 per cent se­quen­tial growth in the gold loan port­fo­lio.”

An­other trend is that de­mand for sil­ver seems to be gain­ing pop­u­lar­ity in In­dia. Data from In­dia’s trade min­istry re­veals

The World Gold Coun­cil fore­casts the coun­try’s gold de­mand this year will fall to its low­est level in three years

that im­ports of sil­ver into the coun­try surged by 72 per cent in Au­gust over the same month the pre­vi­ous year to 543.21 tonnes.

Jew­ellers in­clud­ing Mr Chok­shi, how­ever, in­sist that “sil­ver is catch­ing mo­men­tum in In­dia, but it’s not re­plac­ing gold”.

Sachin Kothari, the di­rec­tor at Aug­mont in Mumbai, a pre­cious me­tals man­age­ment com­pany with on­line op­er­a­tions of trad­ing of gold and sil­ver, be­lieves oth­er­wise.

“Be­cause the gold prices have gone up and peo­ple still want to buy pre­cious me­tals, they have sub­sti­tuted gold-buy­ing with sil­ver-buy­ing.” On its part, the In­dian govern­ment in re­cent years has been try­ing to dis­cour­age peo­ple from buy­ing phys­i­cal gold – with im­port duty hikes, for ex­am­ple – be­cause it is seen as an un­pro­duc­tive as­set. Costly im­ports of the pre­cious metal weigh heav­ily on the coun­try’s trade deficit. The govern­ment in­creased the im­port tax on gold this year to 12.5 per cent from 10 per cent.

Given the drop in de­mand for the metal, Reuters re­ports that gold im­ports into In­dia tum­bled 33 per cent to 38 tonnes in Oc­to­ber, de­clin­ing for the fourth con­sec­u­tive month.

“The de­cline of gold de­mand in In­dia is not nec­es­sar­ily a bad thing; with crude and gold be­ing the big­gest items in the In­dian im­port bas­ket any soft­en­ing in de­mand for ei­ther in the face of stag­nant ex­ports helps the In­dian cur­rent ac­count deficit sit­u­a­tion,” says Mr Agar­wal.

The govern­ment has also taken steps to try to bring gold into the for­mal fi­nan­cial sys­tem, with the in­tro­duc­tion of sov­er­eign gold bonds in 2015, for in­stance.

“With in­creas­ing un­cer­tainty in the fi­nan­cial in­vest­ments be it debt, eq­uity or real es­tate, with the un­cer­tain global eco­nomic out­look and in­creas­ing the safe-haven de­mand for gold, we be­lieve in­vest­ment de­mand for gold is likely to in­crease in the com­ing years,” says Mr Kumar.

Some jew­ellers in In­dia also re­main up­beat. “In­dia’s tra­di­tion­ally al­ways had a love for gold,” says Rashi Sanghvi, the co-founder at Stac Fine Jew­ellery. “Gold is looked upon as an as­set. That holds even to­day.”

De­spite the woes in the sec­tor, Mr Jain is hope­ful that as the wed­ding sea­son con­tin­ues, he will see busi­ness pick up.

Reuters

In­di­ans be­lieve gold brings good for­tune and is a way to show off wealth

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