Gold's Best Start in Over 30 Years Leaves India Buyers Unruffled

Where Are Gold Prices Heading?
  • Volatile prices discourage investors in second-largest user
  • Poor harvests shrink incomes, reduce purchases in countryside

While global investors have piled into gold as a haven from financial turmoil in 2016, the metal’s best start to the year in more than three decades has tempered the enthusiasm of buyers in India.

QuickTake The Rise and Fall of Gold

“When there’s volatility in gold, people tend to shy away from making a purchase,” said Rajesh Khosla, managing director at MMTC-PAMP India Pvt., the biggest refinery in the country. “It’s not that they won’t buy, but I don’t see the sort of volumes we have seen in the past years,” he said in an interview.

Bullion surged as much as 19 percent to $1,263.48 an ounce this year after the Federal Reserve signaled it may delay further interest-rate increases and as assets in exchange-traded funds expanded to the highest since July. That hit demand in India, the largest user after China, as buyers deferred purchases to see if the gains held. Prices have already dropped 5 percent from last week’s high to $1,200.82 and Goldman Sachs Group Inc. sees $1,000 in 12 months.

There may be other reasons why people in India are not so keen to buy. Farmers faced an almost dry winter after the first back-to-back shortfall in monsoon rain in three decades, which has cut harvests of everything from rice to sugar cane. That’s hit incomes in rural India, which accounts for 60 percent of the nation’s gold demand. Buyers also have to declare their unique identity numbers on purchases above a certain limit.

“I’d be very cautious on gold as right now we have a combination of factors affecting demand like the domestic agriculture scene and the global volatility,” Khosla said. “The mix of the two means that people will wait and see.”

No Hurry

Consumers are in no hurry, Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by phone from Kolkata. “Unless there’s a big slump in prices, demand this year will be lower than last year.”

Purchases were 848.9 tons in 2015, World Gold Council data show. Demand peaked at about 1,000 tons in 2010 when India was the largest consumer. The nation imports almost all the gold it consumes and is trying to cut reliance on foreign supplies to curb the current-account deficit and help the rupee. The latest salvo involves encouraging people to lend or sell to banks some of the 20,000 tons in the hands of households and temples.

The government has introduced gold bond and deposit plans to attract investors. Progress has been slow. The first slice of bonds, which are linked to the price of bullion, lured investment equal to 917 kilograms, while the second tranche pulled in 2.79 tons. The authorities are fine-tuning the deposit plan, known as a monetization scheme, where investors give banks a minimum of 30 grams to earn interest over a fixed period, and at maturity they can either redeem in bullion or cash.

Unique ID

The jury’s still out on the plan. The deposit scheme may take three to five years before it has a significant impact, Khosla said. “As the price of gold increases, people have the tendency to monetize it more as distinct from selling it, and then gold monetization will pick up, but then again it’s not an instant solution.”

Jewelers say sales weakened after the government made it mandatory for customers to declare their unique identity numbers on purchases above a certain amount, according to Bamalwa from the federation. The government cut the limit for disclosure of transactions to 200,000 rupees ($2,935) from 500,000 rupees on Jan. 1 to curb the circulation of black market money.