The Indian gold market has been very sluggish so far this year as high prices and straitened economic times have taken their toll. Figures from the World Gold Council (compiled by GFMS Ltd) showed that in the first quarter of the year scrap supplies were so strong that demand for investment bars and coins net of scrap was negative, with a return to the market of 17 tonnes, while jewellery demand for the quarter stood at just 34 tonnes against a quarterly average over the previous five years of 133.5 tonnes - an effective fall of 75%.
While scrap return eased during the second quarter, anecdotal evidence suggests that the past three months have not painted a pretty picture either. The Bombay Bullion Association has reported that Indian gold imports were down 50% year-on-year in the first half of this year compared with the first six months of 2008.
To put this into perspective, Indian gold jewellery and investment product demand is recorded by the WGC at 713 tonnes, compared with 769 tonnes in 2007 and 710 tonnes in 2006. If these import figures can be taken as a benchmark indicator pure and simple then this suggests a shortfall of some 350-400 tonnes in demand this year, but the early figures for demand suggest that the drop may well be larger.
Jewellery fabricators have been reporting intermittent business, but appear to have come to the end of the wedding season with inventory in hand. Local prices, however, have not been especially kind to the market - generally speaking Indian prices have oscillated around international price levels and although the local market has been weak, prices have not dipped to enough of a discount to stimulate exports. As result, when (if) the jewellery markets pick up in September at the end of the monsoon season and before the important festivals such as Diwali, there may well be metal already in the country and available for sale.
Trouble is, we don't yet know how strong the pick-up is likely to be and the latest bad news is meteorological. The monsoon is late and is expected to be below average for the first time in four years.
This is potentially significant as the strength of the monsoon is obviously vital to the quality of the harvest and this in turn dictates the amount of funds that the farming community (which constitutes more than half the Indian population) has to hand when the harvest is in. Gold has traditionally been one of the primary purchases for the Indian agrarian population (although it is now having to compete to some extent with white goods, electronics and holidays), who typically account for between 60% and 70% of Indian gold purchases. A poor harvest will undermine gold buying and crop failures have already been reported.
So a poor Indian market in the year to date does not look as if it is going to show much upside later in the year either. For the longer term, a number of incentives are underway for streamlining the industry that should make it more efficient and by association may be have a knock-on positive effect on demand. The Indian Bullion Market Association has been formed that should allow for a uniform gold price across the country as opposed to the prevailing system, which can result in sizeable variations. The domestic price will be determined on the basis of the trade flowing across the electronic platform set up by the National Spot Exchange Ltd (NSEL) and set as a benchmark twice a day - although the Managing Director of NSEL has said that a wholly uniform price will not be logistically feasible until the implementation of the Goods and Services Tax, due by March 2011.
At an international level, the Bombay Bullion Association has recommended that local gold traders should be allowed to import gold directly rather than having to got through agencies or banks and is also lobbying for the removal of central sales tax on gold. The NSEL is also lobbying for the government to abolish the 2% customs duty currently level of imports of doré gold that is destined for local refineries in order to boost their flow of feedstock. The local industry is fragmented and working well below capacity - although its capacity itself is also small in the context of the market overall, at between three and four tonnes per annum.
Plenty of moves afoot in the country, then, including innovations from NSEL in the form of mini-contracts from eight grammes up to one kilo as of the start of July (previously the contracts were denominated in 100 grammes and one kilo) as part of the NSEL ‘s push to raise its position among the world's gold price setters. Meanwhile, the depressed level of local demand means that India may continue to face a fight with China for the position as the world's largest gold consumer. China won the first quarter this year; will it have won the second quarter?
