Many analysts in India and around the world are anticipating the strongest gold & gold jewelry buying in four years during this year’s festival season thanks to the fortuitously timed sharp drop in gold prices. The beginning of Diwali will fall on October 30th this year, with the first day of festivities known in parts of India as Dhanteras.
It’s a relief to hear, then, that India just had its best monsoon season in three years, with heavy rains washing away people’s fears of yet another drought. Good rains – the best monsoon in three years means better income. Two-thirds of gold demand still comes from rural India and it’s a key driver this time round. Plentiful monsoon rains in India tend to drive up demand for gold jewelry among rural, income-flush farmers, who make up a third of the country’s consumption of the yellow metal.
Add to that the fact that gold bullion is now trading in the affordable $1,250 to $1,260 range—a sizeable discount from only a month ago—and gold jewelry sales in India are expected to surge as much as 60 percent over last year, according to the India Bullion and Jewellers Association.
That would take sales to a four-year high as we near Diwali—traditionally a time when gold & gold jewelry buying is considered auspicious—which would help support gold prices.
Following Diwali comes the important Indian wedding season. It’s almost impossible to exaggerate how massive this industry is, with one India-based research firm expecting it to hit 1.6 trillion rupees ($24 billion) by 2020. Between 35 percent and 40 percent of a typical Indian wedding’s expenses is devoted to gold jewelry. If we use the higher estimate, that means close to $10 billion could be spent on gold jewelry alone.
For millennia, gold has played a key role in Indian culture, valued not only for its beauty and durability but also as financial security, says Frank Holmes. That’s no less true today. A 2013 survey conducted by the Federation of Indian Chambers of Commerce & Industry (FICCI) found that more than three quarters of Indians view the precious metal as a “safe investment.”
The same FICCI study also found that gold is a regular line item in most Indian households’ budgets, comparable to what they spend every year on medical expenses and clothing.
Indian Gold Jewelry
It should come as little surprise, then, that Indian households have the largest private gold holdings in the world. Standing at an estimated 23,000 tonnes, and worth close to a whopping $1 trillion, the amount surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.
After logging its best first half of the year in 40 years, gold is now trading range-bound while we await the Federal Reserve’s decision to raise rates in December. Most, but certainly not all, of the recent economic data seems to be pointing in this direction, with initial jobless claims at a four-decade low, voluntarily quits at pre-recession levels and household income finally on the rise.
Last week was especially brutal. With markets in China, the world’s largest consumer, closed in observance of Golden Week, the short sellers had free rein, driving the price down more than 3 percent on Tuesday alone.
Despite the weakness, inflows into gold ETFs continued to pour in during this week and last, as savvy investors recognize that real, or inflation-adjusted, Treasury yields are still in negative territory. I use the 2-year yield here because it’s what many currency traders look at it.
But now some analysts see gold ready to turn again, perhaps prefacing a rally that could carry the metal to an all-time high.
In a note this week, UBS said that as long as the Fed doesn’t hike rates too quickly, gold should resume its upward momentum. And remember, the bull market was triggered last December after the Fed raised rates for the first time in nearly a decade.
Meanwhile, London-based investment firm Incrementum suggested this week that gold could reach a new record within the next two years, supported by higher consumer prices, low to negative government bond yields and a lack of confidence in central bank policy.
“In this uncharted territory, with big monetary experiments going on, it just makes sense” to hold bullion, Ronald Stoeferle, a managing director at Incrementum, told Bloomberg.
Even as precious-metals prices continue their downward trend, market watchers continue to affirm their faith in gold as an economic safe-house in an uncertain financial world. The factors at play are numerous; ranking high among them are a tense U.S. election season, the conviction that the Fed won’t raise interest rates above a bare minimum, increasing adoption of negative interest rates in Europe and Asia, and lingering (if somewhat diminished) uncertainty in the wake of Brexit, said Diana Plattner.
India is famed for its love of gold. In a country that lacks an old-age program like our Social Security system, gold is a critical store of value, especially for the rural families that constitute about two-thirds of the population. It is also an excellent way to hide wealth from the government; according to a Reuters report, only 3% of Indians pay income taxes, and a recent government attempt to keep tabs on large gold purchases seems to be backfiring.
The fortunes of the rural populace are dependent on the country’s two monsoon seasons for irrigation, so much so that much of India’s cultural and economic life revolves around them. The June-to-September season is a tremendous factor in the economic activity of Diwali, the five-day festival that takes place around the end of October.
Psychologically, there is a great deal of pent-up demand in India, as high gold prices earlier in the year dampened spending on gold jewelry and gold bars. In mid-September, when gold prices were still strong, families were actually selling gold to buy extra seed in anticipation of a strong finish to the good monsoon season.
In addition, two years of drought have kept Indian purse strings uncomfortably tight. To counter weak sales earlier in the year, vendors offered strong discounts; although these have shrunk with falling gold prices, they are still both plentiful and generous. Add to that the fact that the monsoon season was all that was hoped for, combined with currently low gold prices, and the stage is set for major spending on gold & gold jewelry during the latter part of the year—especially on the first day of Diwali, which is considered a particularly auspicious time to buy Lakshmi’s beloved metal.
Historically, world gold prices have usually received a bump in the fourth quarter, with the demand for Diwali gold jewelry playing a major role—and of course, with the monsoon season playing a major role in that demand. The connection is more than a mere wise-guys’ angle. Last year, Thomson Reuters studied the data pertaining to 10 monsoon-dependent crops from the 1985–86 financial season to date and found a 0.97 correlation between crop revenue and gold jewelry buying behavior during any given season.
This year, the monsoon season has been the best since the 1990s, and the All India Gems and Jewelry Trade Federation estimates that the gold jewelry market will be up by 40% in value and 20% in volume. (Note that Thomson Reuters predicts an 11% increase.) Somasundaram PR, director of the World Gold Council’s Indian operations, said at a recent conference that India is “looking at a healthy [sales] growth, which will be double digits, with rural India being the key driver.”
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