Structural changes in the economy are undermining the reasons to buy bullion

As jewellers try to drum up excitement over the festival of Akshaya Tritiya, there’s a tinge of anxiety to their efforts this year. Instead of urging buyers to pre-book their gold to avoid the rush, they’re doling out discounts to woo them.

There’s good reason for this diffidence. India’s gold demand plummeted to a seven-year low of 676 tonnes in 2016, data from the World Gold Council (WGC) shows. WGC, a producer’s body, cites the jewellers’ strike, the income disclosure scheme and the withdrawal of high-value currency notes as reasons for this unusual slump. It expects a revival this year.

But long-term data shows that Indian gold buying has been heading down a slippery slope for at least four years now. Remember the time when the government was trying out every trick in the book to get us to buy less gold?

India’s gold demand topped 1,000 tonnes in 2010, setting a multi-year record.

It remained at more than 900 tonnes between 2011 and 2013. But it has headed downhill thereafter, with demand for 2016 a good 33% below that record.

Three structural shifts in the economy suggest that gold demand may not get back to the 900-1,000 tonne levels anytime soon.

Dwindling returns

First, gold’s allure as an investment is fading. Whether they’re buying jewellery or stocking up on bars and coins, Indians view gold as an investment first. In the aftermath of the global financial crisis in 2008, global gold prices shot through the roof and the rupee plummeted against the dollar. This lifted domestic gold prices (24 karat) all the way from ₹1,060 per gram in December 2007, to ₹3,000 per gram by December 2012.

In these five years, Indian gold investors made a double-digit return every single year. While bullion was on a song, the stock market was going through a rough spell with the BSE Sensex losing 4% in these five years. Investors chased high returns by stockpiling gold.

In 2014, the tables turned with the NDA’s ascent to power. Between 2013 and 2017, the Sensex has climbed 54% while gold has declined by 5% in rupee terms. Investors have thus shifted their loyalties.

Vanishing ‘investment’ demand for gold is evident from the halving of bar and coin sales between 2013 and 2016, even as jewellery sales fell only 17%.

While casual jewellery purchases have shrunk, wedding demand has been resilient.

With global equity markets upbeat and the rupee displaying strength, gold looks unlikely to repeat its dream run for now.

The government’s crackdown on unaccounted money and the PAN card requirement for big jewellery purchases are also likely to permanently push some affluent buyers out of this market.

Tamed inflation

Savers in Bharat have traditionally flocked to gold as an inflation hedge to shield their savings from runaway price rise.

An econometric study by WGC notes that for every 1% rise in inflation, Indian gold demand spikes by 2.6%.

The years from 2008 to 2013 saw elevated inflation in India with CPI inflation averaging 10%.

From 2014 onwards, inflation has sobered down to 5% levels. There is thus less temptation to buy gold as an inflation hedge.

With RBI donning the mantle of inflation warrior and signing a binding agreement with the government to contain price rise at 4-6%, the ‘inflation hedge’ argument to buy gold is much weaker.

Losing weight

The demographic shift in India, which is triggering booming demand for everything from smartphones to sedans, is having a strange impact on gold purchases.

Companies such as Titan note that jewellery-buying behaviour of the GenNext is changing.

For one, jewellery is viewed as just another consumer item vying with the latest smartphone, designer dress or holiday abroad, for a share of the young consumer’s wallet. Two, as jewellery is expected to make fashion statement, light-weight and low-karat pieces are preferred over clunky jewellery. Over the long run, this means less tonnage of gold sold.

But if the jewellers aren’t exactly thrilled with all these trends, the government surely is. In FY17, India spent roughly $27 billion on gold imports. That’s less than half of the $56 billion it splurged in FY12 when the gold fetish was at its peak. That’s a cool $29 billion saved in foreign exchange!