(Mike Maharrey, Money Metals News Service) Indian gold demand held up during the Diwali season despite surging prices, as festival buying was boosted by strong investment demand.
Diwali is the Hindu festival of lights. It is considered an auspicious time to buy gold, and many Indian couples choose to get married during the festival season. Gold demand typically spikes during festival seasons.
Some analysts thought the recent surge in gold prices might dampen demand during Diwali. Gold hit multiple new highs in rupee terms last month, charting a 5.5 percent gain. So far, gold is up 17 percent in rupee terms this year.
The gold price has been mitigated somewhat by a big reduction in import duties on precious metals. In July, the Indian government cut taxes on gold and silver imports by more than half, lowering duties from 15 percent to 6 percent. The move initially pushed prices down by about 6 percent and drove record gold imports in August.
Indian gold consumers tend to be price-sensitive, but gold demand has remained strong even as prices surged.
According to anecdotal information gathered by the World Gold Council, jewelry stores reported higher foot traffic during the Diwali buying season. The WGC said auspicious “token” purchases were “rather broad-based, spanning regions and demographics.”
While the rising gold price may be slowing retail demand, it has boosted investor sentiment and made gold an attractive long-term investment option. This drove a surge of investment buying last month, with gold coin sales particularly brisk.
Volatility in Indian equity markets has also caused tailwinds for investment demand.
This surge of interest in the yellow metal was reflected in Indian-based gold ETFs. From July to October, monthly inflows of gold into Indian funds increased from ₹5.3 billion to ₹15.4 billion.
According to the Association of Mutual Funds in India (AMFI), Indian ETFs reported net inflows of ₹19.6 billion ($233 million), pushing the total assets under management (AUM) to a new high of ₹445 billion ($5.3 billion). This represented a 12 percent month-on-month increase and a 70 percent gain on the year.
Indian funds have added 12.2 tons of gold to their holdings in 2024.
October Indian gold imports were estimated to be between 90 and 92 tons, in line with expectations. That was up from 59 tons imported in September.
Since the import duty cut, imports have averaged around 95 tons per month, up from a 50-ton average earlier in the year before the tax relief.
Year to date, gold imports are up around 21 percent.
India ranks as the second biggest gold market globally behind China. Indian gold demand can have a significant impact on global prices.
India’s Central Bank Also Gobbling Up Gold
Indian consumers and investors aren’t the only ones stocking up on the yellow metal.
The Reserve Bank of India added another 28 tons of gold to its reserves last month. The Indian central bank has been one of the biggest central bank gold buyers this year. So far this year, the RBI has increased its gold holdings by 78 tons.
Gold currently accounts for about 10 percent of India’s total reserves, the highest level since 1999.
The RBI has been buying gold since 2017. Over that period, it has increased its gold reserves by over 260 tons.
An Indian economist told the Times of India that the push to accumulate gold was based on both political and economic reasons. He said that the “reliability” of the U.S. dollar has “diminished.” He noted the “noticeable decline” in the confidence in U.S. dollar assets.
Another economist told the Times, “It makes a lot of sense (to invest in gold), given the increased volatility in the FX market, elevated interest rates in the U.S., and, of course, also as the central banks in each economy would like to diversify the asset classes in which they are parking their reserves.”
India has also been bringing its gold back into the country. Last spring, the Reserve Bank of India repatriated 100 tons of gold, moving it from the UK to vaults within India’s borders, and it recently brought more gold home.
India’s Love Affair With Gold
Indians have historically had an affinity for gold. Indian households own an estimated 25,000 tons of gold. That amount is likely significantly understated, given the large black market in the country.
Gold is deeply interwoven into the country’s marriage ceremonies and cultural rituals. Festival seasons typically boost gold demand.
Indians have long valued the yellow metal as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from beyond the urban centers, where large numbers of people operate outside the tax system.
Gold isn’t considered a luxury in India. Even poor Indians buy gold. According to a 2018 ICE 360 survey, one in every two households in India had purchased gold within the last five years. Overall, 87 percent of Indian households own some gold. Even households at the lowest income levels in India hold some of the yellow metal. According to the survey, more than 75 percent of families in the bottom 10 percent of income managed to buy some gold.
The yellow metal was a lifeline for Indians buffeted by the economic storm caused by the government’s response to COVID-19. After the Indian government locked down the country, banks tightened credit to mitigate the default risk. Unable to secure traditional loans, Indians used gold to secure financing. As Indians endured a second wave of lockdowns, many Indians resorted to selling gold outright to make ends meet.
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
