Demand for gold by the private citizens of India, the world's second-most populous country, makes up a significant portion of global appetite for the yellow metal. With the traditional festival season for the country approaching, most experts were calling for a robust showing in gold imports. This has not come to fruition, however, as the El Nino weather pattern has wreaked havoc on rural families and small farmers in India—the humble people who are some of the biggest drivers of the seasonal surge in gold-buying.
Ask a Sugar Farmer
As Bloomberg's Eddie van der Walt elegantly puts it, if you'd like to know more about gold, the best person to ask may well be a sugar farmer in India. Why? Because rural Indians make up the majority (60%) of domestic gold buying in India.
If this is surprising, consider that individual families in India collectively hold more than 20,000 tonnes of gold privately, according to most estimates. That's more than twice as much as any government or financial institution. In effect, these buying power of these everyday people has a huge impact on the global gold market.
The problem has literally been the weather. During the El Nino cycle, India receives below-average rainfall from its seasonal monsoons. (By contrast, in years following El Nino when the rain returns, gold purchases typically spike.) With rains this year registering a dramatic 14% below 50-year averages, agricultural output has been devastated. When farmers aren't making a lot of money from their crops, they have no extra money to spend on gold.
“I was hoping to buy gold earrings for my daughter, but I have given up hope,” said [Ranjeet] Chavan, 35, who grows sugar cane on two acres about 150 miles (240 kilometers) from Mumbai. “The rains weren’t great and my crop didn’t fare so well. How can we even think of gold?”
In India, the Diwali festival season is widely celebrated with gifts of gold, or gold offerings to temples, and is seen as an auspicious time to get married. Traditional Indian weddings feature every kind of gold adornment imaginable (including gold henna) as well as dowries in the form of gold.
Sellers Stuck With Oversupply
In anticipation of the gold-buying fest that is Diwali, Indian jewelers and gold refiners eagerly stocked up on gold. With disappointing sales thus far in the season, these dealers are now desperately lowering the premia on gold in India to their lowest levels above the benchmark London spot price since at least 1998.
This means that Indian buyers normally pay an extra premium on gold because the overseas market recognizes that demand remains strong even at these higher prices. (Premia also rose when the Indian government enacted more restrictive policies regarding gold imports and ownership.) Now, these extra price mark-ups have largely vanished; dealers want to push their gold out the door, and are offering unprecedented discounts to do so.
While it is fairly obvious that this relatively weak demand is due to the lack of rain, some are suggesting that gold sellers in India are lowering premia because they are acquiring gold at discount in the form of doré bars. (Doré gold is the mostly-unrefined gold that comes directly from mines. It's usually about 80% pure, but their purities vary wildly.) Even if they have cheap access to doré bars, it's unlikely that producers in India would derive enough of a profit from the arrangement to dramatically cut premia.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.