India is one of the largest consumers of gold in the world, accounting for roughly a third of the global demand for the yellow metal as gold plays an important role in the country’s culture. 

Indian’s buy gold for many purposes including rituals such as weddings and other celebrations, while the precious metal is also considered a symbol of wealth, which prompts people to use collars and bracelets as a way to show off their financial prosperity.

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Meanwhile, Indians also see gold as a store of value, which results in additional demand from investors who save money by hoarding the yellow metal.

Due to the importance of India’s continuous demand for gold to the market, a decline in consumption from this Asian country represents trouble in the near future for gold prices, and that is exactly what is going on right now. 

Gold imports plunged amid the pandemic 

According to sources familiar with the matter, India’s gold imports in June declined by 86% compared to the previous year as people were forced to stay at home amid the pandemic, having to cancel the rituals that demanded the use of the precious metal. 

India’s imports totaled 11 tonnes by the end of the month, representing a decline of 66 tonnes compared to the same month a year ago when the country consumed roughly 77 tonnes of gold. 

In terms of value, this drop would represent nearly $2.1 billion less than what India consumed the year before and that is a threat to the stability of the recent gold price rally, as lower demand from this country could result in an over-supplied market, a situation that resembles what happened to oil earlier this year. 

The pandemic would be the primary cause of this decline, as jewelry retailers have been forced to shut down their operations as virus cases have spiked in the Asian country, with the case count approaching 2 million as of early August, making India the third most affected country by the coronavirus in the world, even though, in relative terms, only a small fraction of its 1.35 billion inhabitants have been affected.

 However, other causes such as higher retail prices have also contributed to this drop in demand, and the World Gold Council (WGC) has said that India’s demand won’t probably recover for the rest of 2020, especially if a vaccine is not available before the year ends.

How could this affect global gold prices?

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(photo provided)

The importance of India for the global gold market makes any fluctuations of its demand curve a significant development that gold traders should watch closely, as those changes could dramatically influence gold prices in the near future. 

That said, the pandemic could be actually helping to offset the demand shock it caused by also disrupting the supply side, as gold miners have been forced to shut down their operations to some extent to protect their workers, even though of course it is hard to estimate the extent to which those two elements level off or cancel themselves. 

Meanwhile, massive liquidity injections from major central banks including the Federal Reserve and the European Central Bank have pushed real interest rates down to negative territory, which has prompted investors to buy gold to protect their wealth against inflationary pressures. 

Therefore, all things considered, even though India is consuming much less gold than it did a year ago, there are some other variables that may be favoring higher gold prices at the moment.

 Investors should continue to keep an eye on how the situation evolves, especially on the side of gold miners, as a resumption of their usual production volumes could turn out to be bearish for gold prices if a scenario of excess supply unfolds. 

Bottom Line 

India accounts for a large percentage of the global demand for gold and, as a result, the way its local market behaves is important for the gold market as a whole. 

The COVID-19 pandemic has disrupted the usual routines that prompted Indians to buy the precious metal and, therefore, demand may not recover until the virus situation is under control. 

For traders, keeping an eye on how the situation in India plays out is important to anticipate potential upcoming fluctuations in the price of gold, as a subsiding pandemic could result in a short-term boost in demand that could prop up prices even higher.

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