GOLD ANALYSIS

What's the reality of Indian gold demand?

As the world's largest consumer of gold, Indian demand trends are particularly significant with respect to the yellow metal's supply/demand fundamentals.

Author: Lawrence Williams
Posted: Thursday , 27 May 2010

LONDON - 

First quarter gold demand from India showed a huge recovery - there seems to be little doubt of this from the latest World Gold Council statistics covered here yesterday - see Gold scrap unlikely to flow unless prices move much higher - WGC and as the title of the article suggested, the large amount of recycled gold coming on to the market a year earlier has also fallen away drastically.  This suggests that the Indian gold buying populace - easily the world's largest market for gold in a good year - is beginning to accept that high gold price levels may be here to stay and is moving back into buying mode again, which is of major significance in the fundamental gold supply/demand position.

But, what has been happening since the end of the first quarter.  Indian demand is partly driven by buying ahead of what are seen as auspicious festival days and one of the biggest of these is Akshaya Tritya which happened earlier this month.  The days around the Festival coincided with the latest big surge in the gold price to new record levels and there is certainly anecdotal evidence to suggest that because of Indian reluctance to chase up high gold prices as seen in the past, sales were at a much lower level than anticipated ahead of the auspicious days.  Also the gold price has again touched a record high of Rs18,629 per 10 grams in the local currency.  This could suggest another setback in Indian gold demand during the current quarter.

Quiestioned in a Mineweb podcast yesterday by Geoff Candy, Marcus Grubb of the World Gold Council conceded that there have been such reports from the major gold purchasing centres there, but that others suggest a slightly different pattern in other parts of the subcontinent.  There were also reports out of the Middle East - notably Dubai - that Akshaya Tritya demand was good.  There are obviously differing viewpoints here and we will have to wait for more definitive figures to be released before we know what the true situation is in India itself.

Overall though the WGC seems confident that Asian gold demand is currently strong, with Chinese demand continuing to grow at a high rate.  Investment, rather than jewellery, demand in the form of purchases of gold bars and coins is also rising in the region - not least because of marketing campaigns designed to increase awareness of this particular option - and the recent World Gold Council agreement with China's biggest bank, ICBC, to enter a marketing co-operation agreement may further increase the trend once it begins to take effect.

But overall gold's fundamentals have been thrown into disarray by global investment demand.  This could be fickle, although  with continuing warnings of global meltdown this is likely to continue at high levels for some time - and at least until things are genuinely seem to be improving in Europe and North America where much of this demand is arising.

But returning to India - the perhaps grudging acceptance that higher price levels are likely to stay should see demand there regaining most of its past strength - unless, of course there is yet another strong gold price surge making purchasers nervous again and bringing more recycled gold onto the market.  Thus Indian demand can be a bit of a balancing factor in the gold equation, showing strength when the price is seen to stabilise - even at higher levels - and weakness when the price surges.  Overall the World Gold Council analysis suggesting good demand strength this year looks to stand up, but could be proved over-optimistic if some of the more bullish gold price projections become reality .