India’s record gold imports boost bullion

A surge in demand among Indian consumers for gold jewelery and bullion, following a recent tariff cut, is helping push global bullion prices to a series of new highs.

India’s gold imports hit a record high against the dollar in August at $10.06 billion, according to government data released on Tuesday. That translates to about 131 tonnes of bullion imports, the sixth-highest total on record by volume, according to a preliminary estimate by consultancy Metals Focus.

The high price of gold – which has risen by a quarter since the start of the year – has traditionally deterred price-sensitive Asian buyers, with Indians reducing demand for gold jewelery in response.

But the Indian government cut import duties on gold by 9 percentage points in late July, sparking a renewed surge in demand in the world’s second-biggest gold buyer.

“The impact of the tax cut was unprecedented, it was incredible,” said Philip Newman, managing director of London-based Metals Focus. “It really brought consumers in.”

The rate cut has been a boon for Indian jewelery stores such as MK Jewels in Mumbai’s upscale Bandra West suburb, where director Ram Raimalani said “demand has been fantastic”.

Customers thronged the store looking for necklaces and bracelets on a recent afternoon, and Raimalani expects annual sales to increase by as much as 40 percent during the months-long festival and wedding season that runs from September until February.

Raimalani praised the government of India and “Modi ji”, an honorific for Prime Minister Narendra Modi, for reducing taxes on gold.

Expectations of a quick interest rate cut by the US Federal Reserve have been the main driver of gold’s huge rally this year, according to analysts. Lower borrowing costs increase the appeal of non-yielding assets such as bullion and are also likely to weigh on the dollar, in which gold is denominated.

The Fed cut interest rates by half a percent on Wednesday, pushing gold to a new record just below $2,600.

But strong demand for jewelry and gold bullion, as well as buying by central banks, also helped push prices higher.

India accounted for about a third of demand for gold jewelery last year and became the world’s second-largest bullion and coin market, according to data from the World Gold Council, an industry body.

However, this demand has meant that India’s domestic gold prices are quickly reaching their pre-tariff cut levels, according to Harshal Barot, senior research consultant at Metals Focus.

“The whole benefit (of the fare reduction) is kind of gone,” Barot said. “Now that prices are rising again, we’ll have to see if consumers are buying as usual.”

Jewelery buying fell ahead of import duty cuts, with demand from India in the first half of 2024 at the lowest level since 2020, according to the World Gold Council.

India’s central bank has also been on a gold-buying spree, adding 42 tonnes of gold to its reserves in the first seven months of the year – more than double its purchases for the whole of 2023.

A person familiar with the Reserve Bank of India’s thinking called gold purchases a “routine” part of foreign reserve management and currency stability.

In China, the world’s biggest physical buyer of gold, high prices meant fewer sales of jewelry but more sales of gold bullion and coins, which rose 62 percent in the second quarter from a year earlier .

“We have observed a strong positive correlation between gold investment demand and gold prices,” the World Gold Council wrote, referring to China.

All of this has helped support the physical market and mitigate the impact that high prices can have on eroding demand.

“It acts as a stable base for demand,” said Paul Wong, market strategist at Sprott Asset Management. “In parts of Asia, gold is easily convertible into currency,” making it popular for savings, he said.

Western investor demand was also a big factor in bullion’s rise, with a net flow of $7.6 billion into gold-traded funds over the past four months.

After hitting a new high on Wednesday, analysts are warning that there could be a correction in the price of gold.

“When you have this scale of anticipation (of rate cuts), for so long, there is room for disappointment,” said Adrian Ash, London-based director of research at BullionVault, an online gold market. “I think there is room for a pullback in price alongside other assets.”

Whether or not gold pulls back from record highs, demand for jewelery in India looks set to remain strong through the upcoming wedding season, according to Raimalani of MK Jewels.

The rise in bullion prices was not a deterrent to his customers, he added. “Indians are happiest when prices go up because they already own so much gold. It’s like an investment.”