Gold has always been considered as a traditional investment tool by Indians; once gold coins were used to be a currency. Later this approach changed and Indians mostly turned towards gold jewelleries. This inclination has been continuing till date, while the festive season usually attracts most of the yearly sales.
Types of gold demand in this festive season
During the festive season, gold jewelleries are bought mostly for weddings or other auspicious purposes. About 60% to 70% of India’s gold consumption is in the form of jewellery. According to a Crisil Ratings report, the revenue for gold jewellery retailers in India will increase 12% to 14% in FY 2022. Anuj Sethi, a senior director at Crisil Ratings said, “Pent-up demand from weddings, which account for 55% to 60% of overall jewellery sales, and festivals will help resurrect revenue just as they did last fiscal.”
Earlier, Ajoy Chawla, CEO, Tanishq told the media that, October and November normally account for 25% of their business for the year, which include Dussehra and Diwali.
Gold is a popular investment option as a hedge against inflation. So, global inflation pressures, mostly the 'stagflation' in the US, highest in the last 30 years, have increased gold demands. Similarly, the Indian inflation rate of around 5% is encouraging gold demands before the festive season this year. The country's economy has only started to recover, manufacturing data and employment data are not assuring as yet. So, concerns of inflation are still worrying investors, and ahead of Diwali and Dhanteras, gold is holding a strong demand across the country.
International price pressures
Gold jewelleries hold the top portfolio among all kinds of gold investment but India does not produce much gold to meet the country's demands. So, India has to import gold from international markets and therefore Indian gold rates are determined by international prices. Before Diwali, gold rates in India are surging, as, in late October, gold rates stayed above the psychological high of $1800/oz. So, in India, 22 carat gold rates at the end of October were quoted around `47,000/10 grams.
Earlier in September, 22 carat gold rates (monthly basis) dropped by 4.08%. Then, it was anticipated that a subdued gold rate will boost gold demands in Dussehra and Diwali. However, a rising gold rate can impact the gold business negatively. Although the US Federal Reserve has declared they are not going to hike the interest rate soon, as the impacts of the pandemic are continuing. So, the market globally is behaving soft -as of now. The US dollar index is also inversely related to gold prices. Hence, the gold market is quite volatile now.
Gold demand drivers
According to the World Gold Council's recent report of October 2021, for each 1% increase in gross national income per capita, gold demand rises by 0.9% in India. 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.
A World Gold Council data shows that Indian citizens have bought 315.9 tonnes of gold jewelleries in 2020 - which is almost equal to the combined purchases in North and South America, Europe, and the Middle East. However, China remained the biggest buyer at 433.3 tonnes. But during the pandemic gold demand fell more than a third to a 25-year low of 446.4 tonnes compared with 690.4 tonnes in 2019, as the gold rates surged to historically high levels in 2020.
The central government has already mandated BIS to make the hallmarking system mandatory. Hallmarking determines the purity in carat for gold such as – 22K916 (22 carat), 18K750 (18 carat), and 14K585 (14 carat) gold. However, small jewellers and jewellery associations have opposed it because they think it will stress the small-scale sellers. These small jewellers sell many gold jewelleries that are not hallmarked. So, this will impact their business negatively during the festive season when the effects of the pandemic are not yet over. They have also identified the rule as an 'arbitrarily implementation'. They are also worried because now the jewellers will be involved solely with the Hallmarking Unique ID (HUID) procedure along with the assaying and hallmarking centres (AHCs). It is a lengthy process. However, the mandatory hallmarking system will assure the buyers of the purity of gold and will also help them at the time of resale to get the exact price of the piece. Anuj Sethi of Crisil Ratings commented, “The organised segment of the market will benefit from lower import duty and introduction of mandatory hallmarking from June 2021, which will make them more competitive compared to unorganised players.”