Gold’s retreat: What determines India’s growing appetite for this metal? | The Financial Express

Gold’s retreat: What determines India’s growing appetite for this metal?

While lower domestic prices augur well for pushing physical gold demand, the World Gold Council has a somewhat different take on India’s consumption till this year-end.

Gold’s retreat: What determines India’s growing appetite for this metal?
dia is no ordinary country as far as gold is concerned as it is the world’s second-largest consumer, accounting for 20% of global demand. (IE)

Through the ages, gold has traditionally been a hedge against uncertain times. This precious metal ought therefore to be in the spotlight as the world economy is buffeted by adverse headwinds that unnerve investors. There is the prospect of a global recession as growth is weakening in the most powerful economies as central banks aggressively raise interest rates to check inflation. There are worsening geopolitical tensions. Stock markets are on the edge the world over. With such worries, the surprise is that gold prices are sliding globally as well as in countries like India. A proximate cause is the growing strength of the US dollar—up by 20% against a trade-weighted basket of currencies over the past year and at its highest levels in two decades. The high-yielding US currency unit is more the safe haven in these troubled times than gold; as a result, spot prices of the precious metal have been plunging to their lowest levels in two years. They hovered above $1,700 per ounce through much of September but plummeted last week, breaching technical support levels that held since 2020 according to Bloomberg. Domestic gold prices, too, have fallen in tandem—last week, they were at their lowest levels since February 11—ahead of the forthcoming festive season.

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While lower domestic prices augur well for pushing physical gold demand, the World Gold Council has a somewhat different take on India’s consumption till this year-end. India is no ordinary country as far as gold is concerned as it is the world’s second-largest consumer, accounting for 20% of global demand. Demand is pegged at 800 tonnes this year, marginally up from 797.3 tonnes in 2021, which will be met by imports, straining the country’s balance of payments. Although consumption rose by 42% in the first half of this year, it is expected to be muted in the second half as higher consumer inflation erodes disposable incomes of the middle class and in rural India. This is notwithstanding the expected bump in festive demand. The segment that is hit the most is the one earning between `2 lakh and `10 lakh per annum that has accounted for 56% of total consumption during the last five years, according to the India Gold Policy Centre at the Indian Institute of Management, Ahmedabad.

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What are the determinants of India’s gold demand? The late eminent economist, A Vaidyanathan, in his research outlined several explanatory factors. One is real GDP as a proxy for rising agricultural and non-agricultural incomes. The other is household savings in financial assets. For any given level of GDP, higher the household savings in financial assets, higher will be the demand for gold. Demand also depends on the relative price of gold and other financial assets, which can be proxied by the index of share prices like the BSE index. The ratio of domestic gold prices to the index of share prices is the most explanatory of all variables. The higher this ratio, the higher were the gold imports that account for India’s consumption. This is a crucial variable, especially since the turmoil in the global financial and commodity markets has become a significant factor depressing stock market sentiment. More such academic studies are necessary to explain India’s insatiable appetite for gold—despite official efforts to curb it through higher duties—the reasons for which are imperfectly understood.

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