Falling physical gold demand-
resourceinvestor.com
How Significant Is Slumping Indian Gold Demand?
By Stephen Clayson
22 Jul 2008 at 12:13 PM GMT-04:00
Should gold bugs be losing sleep over reports that Indian gold demand is on a precipitous downward slope?
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In view of India’s traditional position as the world’s biggest gold consuming nation, reports that its supposedly ever avid gold consumers are drastically moderating their demand for the yellow metal are pretty worrying for the gold-minded investor. Indeed, bullion dealer Kitco’s Jon Nadler wrote on Friday that the issue of subdued Indian demand for gold ‘should have analysts up at night’.
The World Gold Council (WGC) estimates that consumer demand for gold in India fell 50% in Q1 2008 against Q1 2007. Of course, India wasn’t the only country to see a big decline. The WGC estimates that consumer demand in Indonesia dropped 42%*, though the fact remains that India still consumed more than ten times* the tonnage of gold that Indonesia did, making the decline in India rather more worrying.
Figures for Q2 2008 consumer demand aren’t available from the WGC yet but a Hindu Business Line article published last week, also referenced by Nadler, cites figures from the Bombay Bullion Association that make for glum reading.
Does this matter to the global gold market? Well apparently not, at least not at the moment. These dire statistics do not seem to have hurt the gold price, so it looks as if India’s nose-diving consumer demand is not deemed significant by the market in general. But somebody should be looking to the longer term.
Assuming that the Indian economy continues to grow and become more sophisticated in the near future, despite the strong headwinds represented by the downturn in the Western economies and the high oil price, India’s consumers will have the opportunity to purchase an ever widening array of modern goods and services. Will gold seem so important to younger consumers compared with the latest mobile phone or a car? If Indian economic growth falters and the gold price does not fall from present levels, will Indian gold demand suffer even more?
What about the impact of inflation? Conventional wisdom says that people buy gold as a hedge against inflation. Certainly, this is true for the wealthy. However in India, which, putting aside the much ballyhooed wealth of a few oligarchs, remains a country plagued by extraordinary poverty, inflation may be just as likely to push gold out of reach of would-be buyers at the lower end of the economic scale as it is to motivate wealthy buyers. It is noteworthy that inflation in India was estimated at just shy of 12% for the 12 months to June 5, whereas China, which implemented measures to control inflation some time ago, is doing much better, with inflation falling to just over 7% in June.
An interesting contrast is that China’s consumer demand for gold rose 15%* in the first quarter, taking its total consumer demand to a whisker behind India’s*, while Vietnam saw its consumer demand up an astonishing 71%*. This is particularly encouraging as economic growth in these countries, especially in the case of China, is arguably more sustainable in this indubitably testing economic environment than it is in India.
Perhaps wealthier Indians have transferred a substantial amount of their buying activity to the gold souks of Dubai. But even the United Arab Emirates (UAE), of which Dubai is a constituent, recorded a 19%* fall in consumer demand for gold according to the WGC.
So are we witnessing a sea change in the level of Indian gold demand? Or are a substantial number of Indian would-be buyers putting off purchases in the hope that prices will fall? Will this demand kick in at some point even if prices don’t fall?
All that remains to be seen. But India’s traditional affinity for gold certainly isn’t going to break down overnight. Even so, analysts, and gold bugs, definitely have something to think about and maybe even to keep them awake at night.
* Figures as per the WGC – consumer demand Q1 2008 versus Q1 2007, downloadable here.
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