India's gold demand slumps to 11-year low of 102 tonnes in March quarter

Investment demand, though lower by 17%, was relatively better as sentiments towards equities turned negative and investors turned to gold's liquidity and safe haven status

India’s gold demand declined by a staggering 36 per cent during the January-March quarter, to hit the lowest quarterly figure in 11 years due to nationwide lockdown that has forced the closure of wholesale and retail showrooms. 

The lockdown was implemented to prevent crowding which may help contain spread of the Covid-19 pandemic.

Data compiled by the World Gold Council (WGC) showed India’s gold demand at 101.9 tonnes (worth $5.2 billion) for the January-March quarter, compared to 159 tonnes ($6.7 billion) in the corresponding period last year. Immediate after the Lehman crisis, India’s gold demand was reported at a mere 40.9 tonnes during January-March 2009.

While jewellery demand plunged by a sharp 41 per cent to 73.9 tonnes ($3.8 billion) hitting an 11- year QoQ low for the first quarter of calender 2020, from 125.4 tonnes ($5.3 billion) in the same period last year, investment demand reported a decline of 17 per cent to 28.1 tonnes ($1.4 billion) as against 33.6 tonnes ($1.4 billion in the comparable period last year.

“Indian gold demand in Q1 dropped due to a combination of factors such as high and volatile prices, economic uncertainties and towards end of the quarter, severe logistical freeze following lockdown. Investment demand, though lower by 17 per cent, was relatively better as sentiments towards equities turned negative and investors turned to gold’s liquidity and safe haven status. We are in the midst of a crisis and hence, it would be difficult to estimate gold demand for the entire calendar year 2020,” said Somasundaram P R, Managing Director-India, World Gold Council.

Meanwhile, wedding demand during the first few weeks of the quarter did appear to bring in some seasonal cheer. However, later developments, more particularly since beginning of March, disrupted the market and consumer confidence, resulting in a sharp drop in jewellery demand.

 

India announced a three-week nationwide lockdown on March 25, which was later extended till May 3. Since the pandemic started in Wuhan in China, the nationwide lockdown in that country was announced ahead of the one in India. Gold demand in China declined by as much as 39 per cent YoY during the January-March quarter due to a wash-out in sales during the Chinese Lunar New Year, which falls in February. 

Despite the havoc created by Covid-19 across the world, with most economies implementing nationwide lockdowns, global gold demand was up a marginal one per cent to 1,083 tonnes in the March 2020 quarter. This was largely on account of a sharp increase in flows into exchange-traded funds (ETFs) backed by physical gold. Total flow into gold ETFs during the quarter increased seven fold to 298 tonnes this year from 43 tonnes last year, driven largely by massive investment in the United States and Europe. Investors in India increased their holding in gold ETFs too.

“WGC sees the uptrend in gold for at least another 4-5 years amid safe haven buying. Investible surpluses with individuals have increased due to the quantitative easing being announced by leading countries. The quantum of increase, however, would depend upon the level of quantitative easing,” said Somasundaram.

He added that gold prices have risen sharply to trade currently at Rs 48,000 per 10 grams (including goods and services tax), from Rs 32,000 last year. This spike has proved to be a dampener for gold demand in India, he said.

WGC believes that the price increase may affect the quality of gold available and usher in malpractices in the gold jewellery business. Buyers, therefore, will start demanding better quality and services from jewellers going forward, Somasundaram said.

Meanwhile, the lifetime high prices of gold expectedly increased recycling by 16 per cent. Recycling and collateralised loans against gold may be expected to grow exponentially over the next few quarters as the immediate economic impact of the lockdown becomes evident and hopefully, fundamental reforms follow, easing business sentiment. In such a scenario, it is possible that gold becomes a tool for revival of many small and medium enterprise (SME) businesses and household fortunes.

“This perhaps presents an opportunity to revive GMS (gold monetisation scheme) in a consumer- friendly manner. Consumer sentiment could receive a boost in the event of a normal monsoon as predicted by Indian Meteorological Department (IMD). Issues of integrity of gold and right value will receive greater consumer attention as prices test affordability," Somasundaram said. 

He believes a digital transformation of the industry could be a positive outcome of the current crisis, as social distancing, contactless payments and other behavioural necessities challenge earlier forms of consumer engagement. 

"We are unable to quantify the impact on full year demand as we do not have sight of several critical factors at play under current circumstances,” he added.