Indian gold demand sees 2009 repeat

Remember 2009? The collapse in Indian gold demand that year offers a template for the current state of the market - and a cause for hope.

In early 2009, as the Indian economy followed the rest of the world off a cliff and the rupee crumbled, gold demand from the world's top buyer of the metal almost disappeared. In the first quarter of that year, demand was just 24.2 tonnes, down 77% year-on-year, according to GFMS data. For the full year Indian gold consumption fell 19%.

More News From Financial Times
Dull economics can keep the shine on gold
Shares fall as fears grow over Spain's banks
'Sticky' gold ETP investors holding on
Negative US sentiment fuels gold rally
Gold lull may just be a pause for bulls

Something similar is happening today: the Indian economy is suffering, the rupee is sliding and Indian gold demand has dried up. The country's economy registered its slowest quarterly growth in nine years in the first three months of this year.

Gold prices have hit records in rupee terms despite being rangebound in dollars, last week rising above Rs 30,000 per 10g for the first time.

Dealers say that gold sales to India - traditionally the largest consumer of the shiny metal, although it looks likely to be overtaken by China this year - are down 50-60% year-on-year since March. The consensus view is that Indian demand is likely to fall 20-30% over the full year.

"Indian demand is appalling," says one senior trader.

Most recently, the monsoon season has started badly, dealing a fresh blow to Indian gold demand since farmers are usually among the keenest buyers of gold.

The collapse in Indian demand is one reason why gold prices have stagnated this year. Despite a recovery from the lows of mid-May to about $1,620 a troy ounce currently, traders say that most investors are staying on the sidelines.

But 2009 may be a lesson for the market. Gold traders are in agreement that the downturn in Indian consumption is a purely cyclical phenomenon; a reflection of the state of the Indian economy.

That means that when the Indian economy recovers, gold demand should bounce back with a vengeance. In 2010, Indian gold consumption soared 74 per cent to a record high of 1,006 tonnes, GFMS estimates, as pent-up demand was unleashed.

A similar rebound, later this year or in 2013, could be just the stimulus gold needs to regain its previous peaks above USD 1,900 a troy ounce.

The key question is: will western investors be patient enough to wait for Indian demand to return?

Since the end of February, when the US Federal Reserve dashed hopes of a new round of quantitative easing, many investors have gone cold on gold, including some of the so-called "real money" players - pension funds, sovereign wealth funds, private banks and so forth - who have been a steady source of demand throughout the bull market. Epitomising the trend, Schroders' private wealth division announced in April that it was trimming its gold holdings.

But the mood appears to have turned somewhat in recent weeks. While there has been no large-scale buying, bankers say that the trend for real money investors to reduce their gold holdings has stopped - and some are once again asking about buying.

The shift is borne out in positioning data, with ETFs witnessing modest inflows since late May and investors on Comex raising their bullish bets from the lowest level since 2008, according to CFTC data.

Investors are transfixed by the Fed meeting today. And indeed, if the US central bank drops a hint of further easing, that would probably be enough to confirm gold's return to favour.

But a rebound in Indian demand later in the year could be truly explosive.