The World Gold Council (WGC) has said that though demand for gold may be more subdued than expected this year following India’s prolonged battle with COVID-19, in 2022 economic growth and the effect of pent-up demand for the yellow metal are likely to herald a period of robust demand. However, it warned that a fresh outbreak of COVID cases could create uncertainties.
India’s gold imports remain strong and retail demand is expected to pick up as restrictions are gradually lifted across the country, it said.
In a report titled ‘The drivers of Indian gold demand’ released on Tuesday, the first in a series of in-depth analyses on the country’s gold market, WGC said that looking ahead, it would appear that if the industry takes steps to become more transparent, more standardised and more in line with global peers, India’s gold market would most likely benefit from positive demographics and socioeconomic changes.
The report pointed out that key econometric factors that influence short-term demand for gold based on three decades of annual data from 1990 to 2020 are inflation, changes in the price of gold and tax regime, and rainfall patterns.
Like investors around the world, Indian savers turn to gold as a hedge against inflation. For each percentage point increase in inflation, gold demand increases by 2.6 percent.
While a steady rise or fall price affects long-term demand, sharp price changes have an impact on short-term demand. For each 1 percent fall in the gold price in any given year, demand increases by 1.2 percent.
An increase in import duties since 2012 depressed demand for gold by 1.2 percent per year.
The monsoon has less of an impact on demand than in the past, but it still affects consumer behaviour. A 1 percent increase in rainfall compared to the long-run average boosts gold demand by 0.2 percent.
In general, jewellery demand is more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax. Consumption patterns also differ between rural and urban consumers. Jewellery is considered both an investment and adornment in rural areas. City dwellers tend to view bars and coins as their preferred forms of investment.
The report finds that all else being equal, three key factors influence consumer demand for gold over the long term. They are income, price levels and government levies. For each 1 percent increase in gross national income per capita, gold demand rises by 0.9 percent, and for each 1 percent increase in the rupee-based price of gold, demand falls 0.4 percent. Import duties and other taxes affect long-term demand, but the magnitude varies depending on whether gold is bought as jewellery or bars and coins.
According to Somasundaram P.R., regional CEO, WGC, “Our latest research reinforces the fact that the drivers of gold demand in India are many and varied. Cultural affinity, long-held tradition and festive gifting clearly play a significant role. However, these qualitative factors are complemented by quantitative aspects, which have jointly shaped India’s demand for gold over the last three decades, such as household income, the gold price and inflation, which is a key issue facing investors in India today.”
The report says trust, education and awareness and innovation will allow gold to retain its position as a valued asset across India. Mandatory hallmarking, good delivery standards for gold bars and a gold spot exchange will drive a sea change in the Indian gold market, building trust among consumers and investors alike.
An orchestrated campaign explaining how to buy gold could inspire many potential investors, especially if this included products that accommodate small, incremental investments. Digital tools, such as online platforms, robo-advisors, mobile applications and e-commerce platforms, will drive accessibility and put gold on a par with other investment assets.
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