Gold imports slumped to its lowest point due to the pandemic- induced lockdown, which forced economic activities to halt completely.
The Indian gold market witnessed its weakest first half in decades, with the gross gold demand contracting by a staggering 64 percent YoY, primarily due to the economic lockdown caused by the COVID-19 pandemic, but also acerbated by the record gold price in local currency terms.
Gold imports slumped to its lowest point due to the pandemic induced lockdown, which forced economic activities to halt completely. India imported only 99 tonnes of gold in H1 this year, a drop of 77 percent YoY compared to the 436 tonnes recorded last year for the same period. Of that figure, 287 tonnes remained available for domestic consumption, compared to just 47 tonnes this year.
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If we look at the refiners’ performance, fine gold recovered from imported doré in the first six months of the year slumped by 70 percent on a YoY basis, while the April-June quarter saw a 96 percent drop in volumes. Some Indian refiners have established strong relationships with Dubai refiners over the years, and as a result, Indian refiners were able to reroute their shipments to Dubai at mutually agreed terms and conditions. Given the volume of shipments was markedly lower than normal times, this gold was easily consumed within the UAE and neighboring countries.
Indian gold jewellery consumption stood at just 109 tonnes in the first half of 2020, 62 percent lower than the level seen in 2019 for the same period. Following a 40 percent year-on-year fall in Q1 jewellery fabrication plummeted 94 percent in the second quarter as the country bunkered down in a bid to control the spread of the virus, putting enormous pressure on the survival of the sector. While large fabrication houses in the organized sector have seen a modest uptick in production (while working at a markedly reduced capacity), manufacturing activities in the unorganized segment have come to a near standstill.
The average gold price in local terms remained 16 percent higher than the corresponding period last year. The largest demand segment for gold jewellery is for marriage. Since the COVID-19 pandemic broke out, the majority of the marriages were deferred for at least a few months and as a result, demand from this segment evaporated. In normal conditions, jewellers get some floating customers who purchase little bits of jewellery for daily wear, or in-house rituals other than marriages, etc. However, this year these customers failed to turn up because of fear of infection and purchases took place only in pockets and at a very low volume.
On the investment side, investment in physical gold was hit hard. Demand was the worst ever as investors could not get to a store to buy bars or coins. Demand decreased by 70 percent year-on-year in H1 to an estimated 24 tonnes. Of course, the majority of this investment took place in Q1 to the tune of 22 tonnes. However, physical investment was shifted to investment in paper products. As per Reserve Bank of India (RBI) data, investors purchased 6.7 tonnes of gold using sovereign gold bonds in the second quarter.
On the other hand, strong inflows have also been witnessed in gold ETFs. Like a sovereign gold bond, gold ETFs attracted 4 tonnes of investment in the second quarter alone, making it another investment option when the physical investment was not possible.On final analysis, we are expecting that the broader economy will start recovering from September onwards as COVID cases in and surrounding the major financial hubs are on the decline. Refinitiv India gold is quoting at Rs.52803/10gm, a record high, and this price will certainly curb demand in Q3, especially as people are waiting for prices to settle at a certain level. While our market sources have informed us that demand has increased in July, this is being compared to the low base observed in Q2. We need to see if sustained buying takes place for at least two months (which we believe is unlikely) before we jump to any conclusions that the market might be returning to normal.
(The author is Senior Analyst, Precious Metals at Refinitiv)
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