India is one of the most important fulcrums for the physical gold market world-wide.  The metal has religious significance to the Hindu population in particular, and over 60% of the Indian population is in the rural community.  As a result, although the country continues rapidly to industrialise, meaning that gold has competition for disposable income and the leisure dollar, the metal’s prime position as a hedge against risk – or a just a simple, solid investment -.remains solid, with farmers still buying gold both as an investment and as a form of wealth

Indian investors are savvy people, though, and do not rush headlong into a market just because ‘twas ever thus.  Although in times past it used to be unheard-of for an Indian gold holder to sell his investment – tantamount to declaring bankruptcy – the market is more pragmatic nowadays.  Gold is sold back in times of distress (and on the professional investment markets, too, not just in the physical world).  Just take a look at the first quarter of 2009.  High prices and straitened economic conditions meant that net Indian jewellery demand was just 38 tonnes, against a quarterly average of 131 tonnes over the previous three years, and 135 tonnes per quarter subsequently.  Investment bar demand was even more heavily hit, registering net disinvestment of 14 tonnes against an average investment of 52 tonnes per quarter and 47 tonnes per quarter thereafter (figures taken from the World Gold Council’s Gold Demand Trends, using numbers compiled by GFMS Ltd).

This historical note is one pointer to a positive future outlook; demand since those sales of Q1 2009 has run at reasonable levels, but the numbers do not suggest that all erstwhile gold sellers have rebuilt their positions.  While some of them may certainly have regained precious metal exposure through silver, the inherent preference is for gold and there is, therefore, an argument for pent-up demand from this source.

Silver is occasionally bought as a proxy for gold, (which, as pointed out in this piece Gold stutters at $1,250 as silver closes on $20 is almost certainly happening at the moment).  It is an old adage that there are only two places in the world where the gold:silver price ratio really counts – on the floor of COMEX and in the Indian physical market – although the ratio has taken on a personality of its own in recent months and attracts more widespread attention than it used to.

Gold price in local Indian terms and the $:rupee exchange rate

In times of ratio extremes then, it is not unusual for a quasi-arbitrage in the physical Indian market.  When the gold:silver price ratio widens sharply then it is not unusual for Indian gold holders to trade out of gold and into silver – and then reverse the operation when the ratio has contracted.  Equally, the same exercise can be conducted in reverse.  Trading out of gold and into silver is particularly likely when absolute prices are high, as well as when the ratios move out of kilter.  Indian jewellery demand is the world’s largest, with a typical market share of 21%.  Indian silver jewellery and silverware typically take up 16% of the world total for silver jewellery silverware and investment products.  In dollar terms the markets are a very different size; the Indian gold jewellery and investment market in 2009 involved gold with an approximate dollar value of $3.6 billion, while the silverware and silver jewellery sector absorbed roughly $600 million.

In addition, when festivals or wedding seasons – especially the latter – are imminent and gold prices are high, then either gold purchases are effectively agreed upon but delayed, or bars may be bought with a view to subsequent fabrication into jewellery or ornaments.

The start of September, which generally marks the end of the monsoon season and the imminence of festivals, brings a number of different elements into play.  This month there are all sorts of interesting elements to consider.  The monsoon has been a good one (apart of course from the tragic developments in Pakistan) and therefore the harvest should be healthy and this will underpin demand from the farming community this year.  The overall market sentiment is bullish, but the current high price (see chart) is deterring a lot of would-be buyers.  Jewellers have been buying into price dips and there is a risk that they will be left with inventory as a result of price-resistance on the part of consumers – but equally it is possible that those consumers will eventually adjust to higher prevailing prices and raise their entry point accordingly.  For the next few days or weeks this will hang in the balance. 

High universal gold prices have been extended in India by the recent weakening of the rupee.  GDP figures for the June quarter were slightly lower than the market had expected, albeit at a robust 8.8% per annum and the market has been concerned about potential inflationary pressures – which of course have underpinned gold demand.  The rupee has touched a seven-week low against the dollar, although local economists are expecting that this trend may be about to change.

So, we are currently looking at the onset of the festival season (although Diwali is relatively late this year on 5th November), the possibility of a rally in the rupee and a good harvest.

All of which point to resurgent physical gold demand from the world’s largest consumer.