In this article, Deborah Gottlieb of Bullion Broker “Sharps Pixley” looks at the fascinating connection between gold in the Diwali festival.
With only a few days to go for October 23, Indians are eagerly preparing for the first day of the nation’s favourite festival: Diwali. This ancient Hindu festival, also known as the “festival of lights”, is a reminder of how closely Indian tradition is tied with gold and how the love of Indians for the precious metal is timeless.
Many Indian festivals and auspicious days are linked to demand for gold and it comes as no surprise that India is one of the largest consumers of gold in the world (second largest after China). It could be said that buying gold is in the DNA of Indians.
Data provided by Credit Suisse suggests that the current demand for gold in India is about 800 tonnes; a number expected to climb even higher following the upcoming festival. The uptake of gold will be of particular interest on the first day of Diwali or “Dhanteras” as there is a particular celebration around 'wealth' and giving. This surge is also expected to have a profound impact on the price of gold in the short term. Speculators and investors who closely monitor the current bearish sentiment surrounding the gold market (including a stronger dollar and rising real US interest rates) are likely to follow demand predictions with interest.
It is, however, gold jewellery that is closely linked with India, as gold ornaments are regarded as a symbol of wealth, a fundamental part of many rituals and a store of value. According to the World Gold Council (WGC), in the last decade, 75% of gold demand in India has taken in form of jewellery. Moreover, the WGC carried out a survey in 2012 which showed that over 60% of Indian women and men approached intend to buy 22 carat jewellery as opposed to designer handbags, designers shoes, luxury cosmetics and personal electronic items.
Bars and coins are also favoured given that they are portable and easily exchangeable during poor harvests. This year was expected to be an El Nino year with a commensurate poor harvest in India; in the event, the crops were more than adequate across much of India and consequently demand has remained more robust than forecast.
An unintended consequence of gold's popularity in India is the corrosive effect it has had on the country's current account deficit. Hoping to reduce the CAD ($32.4 billion in the year ended March 31) and support the rupee, new taxes were introduced (including higher import duties, strict import quotas and limitations on gold-related lending and coin sales) which has meant that Indians in India can be paying a premium of in excess of 12% over the price being paid by their colleagues here in England for a given gold item. Data provided by the WGC also shows that gold imports into India fell 44% to 350 tonnes in the first 6 months in 2014 ; however, the scale of illegal smuggling is hard to quantify and research at Sharps Pixley suggests that the overall level of total imports are actually rising.
With inflation in India running at over 8.5%, locals will appreciate gold's ability to maintain its value in inflationary periods. As said by Devendra Pant, chief economist at India Ratings & Research: “I don’t see the measures going away immediately”. In spite of these counter actions set forth, consumers in India continue to indicate a strong intention to purchase gold over the coming years, and the love affair is nowhere to be ended.
