A revival in domestic demand for gold, deeper discounts, a steady flow of funds into Indian gold ETFs and increased gold buying by the Reserve Bank of India are some of the factors that could buoy demand for the bullion in India, according to a new report.
While gold prices have retreated in June from their May peak, marking the first monthly decline in four months, the drop is a modest 0.8 percent, the World Gold Council said in a report. Prices, however, have remained above the significant threshold of $2,300 an ounce, which was breached back in April.
Subsequently, there has been a resurgence in prices. Gold rates have strengthened in the second week of July, surpassing $2,400, driven by increased expectations of a shift in monetary policy by the Federal Reserve that has led to a decline in the US Dollar and bond yields.
A strong year for gold
Gold has appreciated by 16 percent in 2024 so far, making it one of the best-performing assets globally. Indian domestic gold prices have continued to closely track international gold prices, supported by the relative stability of the USD/INR exchange rate.
Weak demand
Seasonal factors and high prices have dampened the demand for gold jewellery. At the same time, anecdotal reports indicate persistent demand for bars and coins, with indications of a likely shift from jewellery to bars and coins for some consumers. Moreover, there hasn’t been significant distress selling of gold or profit taking from gold sales that is being reported, as consumers anticipate further price increases.
The period from mid-May to July typically tends to be a slack season for jewellery purchasing. A potential revival in demand is expected with the onset of the festival season in the latter part of Q3. The sustained momentum in the domestic economy, coupled with favourable progress in monsoons and crop sowing, has raised expectation of an uptick in demand (both rural and urban) in the coming months.
Deepening discounts
The discount on the domestic gold price to international price, which stayed range bound between $1 to $12 an ounce during mid-April to the end of June, has widened sharply since early July. Discounts have now reached as high as $50 an ounce. This increase can largely be attributed to increase in supply amid subdued demand in domestic markets.
Steady flow into Indian gold ETFs
Inflows into Indian gold ETFs maintained their momentum through June. During the month, Indian gold ETFs recorded net inflows totalling INR7.3 billion, significantly surpassing the 12-month average of INR4.5 billion. Except for April 2024, these ETFs have consistently seen sustained inflows since April 2023.
As of the end of June, total assets under management (AUM) of Indian gold ETFs stood at INR344 billion (approximately $4 billion), a 54 percent year-on-year increase. The collective holding amounted to 47 tonnes, reflecting a 24 percent increase over the same period last year.
RBI increases gold buying
The Reserve Bank of India ramped up gold procurement in June, marking the highest monthly purchase in nearly two years. According to the RBI data and World Gold Council estimates, the central bank acquired 9.3 tonnes of gold during the month, which notably exceeded the average monthly purchase of 5.6 tonnes in 2024. The RBI’s gold purchases in H1 2024 totalled 37.1 tonnes, the highest since 2013 and represents a more than threefold increase from last year.
Furthermore, these purchases have surpassed the total acquisition of the past two years. The RBI’s gold reserves now stand at a record 840.7 tonnes, constituting 8.7 percent of total foreign reserves, up from 7.4 percent a year ago.
Gold imports hold firm
Despite high prices and subdued jewellery demand, gold imports have remained within a narrow range in recent months, fluctuating between $3.1 billion and $3.3 billion from April to June. In terms of volume, imports have ranged between 42 tonnes to 46 tonnes during this period. The gold import bill for June 2024 was 39 percent lower compared to the previous year, totalling $3.1 billion.
In the second quarter of 2024, total imports amounted to $9.5 billion, slightly lower than the previous year’s $9.7 billion. However, there was a 23 percent decline in volume, largely influenced by an 18 percent increase in prices during this period.
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