The Impact of Indian Buyers on the Gold Market

The Indian market has been a very big player in the production and price of gold for many years. However, with the price increases seen in early 2009, many Indian investors are pulling out of the gold market. The drop in precious metal investing from the sub-continent have dropped so precipitously that imports of gold have fallen by 90% over 2008 levels. This has the potential to put a dent of up to 30% of the previous market composition. What remains unclear is how much of this gap can be filled in with increased demand for gold from other nations.

The gold market is rather different in India, with over thirty times as much gold being held in private hands than on public exchanges and electronically traded funds (ETF) gold shares. This massive private holding is spread across nearly several hundred million households. As such, there is definitely a seasonal demand in precious metal investing that coincides with the wedding season.

Much of this is purchased from the international market each year as jewelery or as bullion to be made into jewelry, since India has no gold deposits of its own. In fact, through most of the 'aughts, India has imported between 700-800 tones of gold per year. Usually about 90% of this has been imported from the world's largest producers, including the US, South Africa, Russia, China and Peru. In fact, India has been the largest importer of gold in the world for many years.

Mumbai is the center of India's gold economy, with the largest bullion market in the country found there. Prices, even during the busy wedding season between October and March, tend to remain very near the spot price of gold, partly due to a soft local currency with respect to the dollar. As the wedding season approaches and people are selling their old jewelry in droves, domestic recirculation is more than plenty for a significantly lowered domestic demand.

Like other countries, India has experienced hardship as a result of the worldwide economic crisis of 2008. Thus, more people are willing to sell coupled with a general lack of interest in purchasing the commodity while prices are so high. Perhaps more importantly, many consumers in India are simply foregoing the monetary exchange entirely and having their own gold recast as needed.

However, professional market watchers have almost universally predicted a big rally for gold in 2009, presumably exacerbating the situation in India. What little imports have been made are almost certain to slow down to nothing as 2009 progresses. However, the impact even this major restructuring will have on the actual price or movement of gold will be insignificant as compared with the much larger market forces that are predicted to impact precious metal investing.

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Arthur McGuire

March 12, 2009