Indian gold market a mixed picture of muted consumer demand amid surging imports and exports

(Kitco News) – High prices are choking India’s consumer gold demand even as imports, ETF inflows and central bank purchases surge, according to Kavita Chacko, Research Head for India at the World Gold Council (WGC).

After a negative performance in February, Chacko noted in the latest WGC update that gold hit multiple all-time highs in March as it continues to trade above $2,100 per ounce. “The price increase can, in part, be explained by USD weakness, a decline in US Treasury yields, an increase in market volatility, weak US economic data print, and other factors such as ‘technicals’ and over-the-counter activity,” she said.

“While the gold price touched record highs in USD and other major currencies, the INR included, the domestic landed price in India witnessed a smaller increase of 4% to INR66,529/10g due to the strength in the rupee (0.2% appreciation w/w),” she said.

Chacko said that new record prices have served to choke demand for gold jewelry, which was already muted from months of high prices. “Anecdotal evidence and media reports suggest that both rural and urban centres have experienced a broad-based drop in demand despite the ongoing wedding season,” she wrote. “It appears that jewellers and consumers alike are awaiting a price correction before they add to their stock or buy jewellery.”

She said that even if prices were to moderate, demand is unlikely to improve in the next few months because India’s impending general elections from April to June mean the flows of gold and cash will be closely monitored. 

“Data shows that gold consumption fallen during three of the last four general election periods,” Chacko said. “Some improvement in demand could be expected around the time of Akshaya Tritiya (10 May), as this is traditionally considered to be an auspicious time to buy gold.”

Turning to the domestic price trend, Chacko noted that after trading at a small premium for much of February, Indian gold now trades at a discount relative to international prices. 

“The local price is now trading around US$ 20/oz below the international price (as of 15 March) from a premium that ranged from US$0.25/oz to US$4/oz in February,” she wrote. “The price rise has crimped demand and persuaded jewellers, likely carrying inventory bought before the surge, to sell below the current international gold price, as even in the face of weak demand they can still make a profit. In fact, our analysis shows that there is a small negative correlation (-0.2%) between the international gold price and the domestic premium/discount.”

Inflows into Indian gold ETFs continued for the eleventh consecutive month in February, Chacko noted, with the $93.3 million in inflows the highest in six months.

“At the end of February, assets under management (AUM) in Indian gold ETFs stood at US$3.3bn (INR285.3bn, 33% y/y) with 44.7t of holdings, up 18% y/y,” she said. “Inflows into these funds demonstrate the growing inclination of investors to include gold ETFs in their portfolios. Net inflows in these funds in the first two months of 2024 totalled US$176mn (INR16bn), a stark contrast to the net outflow of US$12.3mn (INR0.34mn) in the same period last year.”

Chacko said that the strong gold ETF inflows are being driven by several factors, including “the surge in gold prices, a growing appetite for tradeable financial products, a substantial increase in capital market investment and the need for diversification, and geo-political tensions.”

Despite this recent strength, she pointed out that gold ETFs still account for only 0.5% of AUM in the Indian mutual fund market. “The huge increase in capital market inflows holds potential for this segment, as evidenced by the recent spate of gold ETF launches,” she said. “Four new gold ETFs have come to the market in just the last six months taking the tally of India’s gold ETFs to 17.”

Chacko also provided an update on the gold holdings of the Reserve Bank of India (RBI) in February, which has been among the most active of the world’s central banks in bullion purchases. 

“RBI data and our own estimates indicate that the central bank was a net buyer of 4.7t of gold during the month,” she said. “This follows 8.7t of gold acquired in January and brings the RBI’s gold holdings to an all-time high of 817t at the start of March. As a percentage of forex reserves, gold accounted for 7.7% at the end of February.”

She noted that the RBI’s 13.4 tonnes of net gold purchases in just the first two months of 2024 “already amounts to more than 80% of its 2023 annual net purchase (16.2t) and represents the largest purchase for the period since 2015.”

Notwithstanding sky-high prices and soft domestic demand, “gold imports in February saw a substantial increase on an annual (134%) as well as sequential basis (222%),” Chacko wrote. “Imports during the month at US$6.1bn were the highest since October and follow three months during which they were repressed.”

According to WGC estimates, February gold imports “were likely over 90t, notably higher than the average 49t imported in the preceding three months as well as a year ago,” she said. “The rise may be due to an anticipated increase in demand during the wedding season, and bullion dealers, manufacturers front-loading inventories ahead of the general elections.”

She also noted that gold imports have seen strong fluctuations over the current financial year. “Monthly gold imports in the eleven months period (April-February) of the fiscal varied between 16.7t and 121.9t(US$1.0-7.2bn),” Chacko said. “This represents a rise of over 20% in volume y/y but remains 8% lower than the pre-pandemic average (FY15-19).”

And the latest export data from the country’s Gem Jewellery Export Promotion Council (GJEPC) shows a similarly mixed picture, with India’s overall gems and jewelry exports declining 12.66% year-over-year to $3.05 billion in February, even as gold jewelry exports surged 16.43% to $821.55 million during the month.

The GJEPC said the divergence highlights “a widening trade gap in the gems and jewellery sector.”