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Indian Gold Market Overview

A Bullish Slant from this Key Market

We recently listened to a conference call with a preeminent expert in the Indian gold market, and several of the points raised during the call merit the attention of commodity-oriented investors. Short term macro issues like the weakness of the dollar or global inflation are often cited as reasons for gold’s recent moves. We believe the Indian market is at least as important as these drivers in determining the near term future of this key commodity.

Hosted by Nitron Circle of Experts and BNY Jaywalk, the talk with the senior gold expert raised several critical points:

  • India is the largest national market for gold in the world, in terms of tonnage. Recent demand growth for gold in India has been nothing short of staggering, with Q207 demand at 370 tons, up over 90% from last year. In fact, incremental demand from India represents virtually 100% of marginal global gold demand in the second quarter of 2007. Understanding the economic and social variables for Indian gold demand is therefore critical to forecasting global gold prices.
  • Current market fundamentals for gold demand in India are robust. Strong economic growth and a rising currency certainly help, but it is equally important to understand the broader economic role gold plays in the country. Many deep-rooted beliefs as well as social customs serve to underpin a rise in gold demand as India’s economy continues to expand.
  • Two products drive gold demand in India – investment products (bullion/coin) and jewelry. The intersection of demand for these products is the wedding season in India as well as a series of important religious festivals. Both of these start in the back half of October and run through late January. Gold plays an important role in intergenerational wealth transfer in India, and weddings and religious festivals are key points when families often hand wealth down to the next generation.
  • Gold also plays an important role in India as a store of value, especially in rural farming communities. Its good price performance through recent global capital markets turmoil has served to further burnish this reputation. Banks even offer “mortgages” to buy gold, recognizing how important this investment is in Indian culture. Farmers will also use gold as a way to preserve wealth in anticipation of potentially lean times ahead.
  • Indian gold merchants are sitting on seasonally peak levels of inventory in anticipation of the wedding and religious festival seasons. Banks have large stocks of bullion and coins, for the same reason. Should the imminent rush of demand not materialize in the next few weeks, both the jewelry stores and banks will have to start to unload inventory. Mitigating some of this risk is the relatively weak production profile of gold mining enterprises. Existing mines supply only a small part of the country’s overall demand, face steep cost/ounce constraints, and have long start-up phases.

We therefore believe that gold investors need to watch the Indian gold market very carefully over the next few month. With gold near multi-year highs, there is little room for disappointment in this important market.

If you would like to arrange a conference call with this expert or otherwise gain insights into the commodity markets in India, please feel free to contact the Nitron Circle of Experts.

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