For every 1% increase in inflation, gold demand in India increases by 2.6%, says new WGC report
New Delhi, October 18, 2021
For each one percentage point increase in inflation, gold demand in India increases by 2.6%, a new World Gold Council (WGC) report released today said.
The report said inflation is one of the key econometric factors that influence short-term demand for gold and, in common with investors around the world, Indian savers turn to gold as a hedge against inflation.
The report, "The drivers of Indian gold demand", is the first in a series of in-depth analysis on the Indian gold market. Using an econometric model, it draws on three decades of annual data, dating from 1990 to 2020, to gauge some of the principal influences driving gold demand in India.
The report said that while steady gold price increases or decreases affect long-term demand, sharp price changes have an impact on short-term demand. For each 1% fall in the gold price in any given year, demand increases by 1.2%.
An increase in the rate of import duties since 2012 has depressed demand for gold by 1.2% per year, it pointed out.
While the monsoon has less of an impact on demand than in the past, it still affects consumer behaviour. A 1% increase in rainfall, compared to the long-run average, boosts gold demand by 0.2%.
The report finds that, all else being equal, three key factors influence consumer demand for gold over the long – term -- income, gold price level and Government levies.
For each 1% increase in gross national income per capita, gold demand rises by 0.9%. For each 1% increase in the rupee- based price of gold, demand falls 0.4%. Import duties and other taxes affect long-term demand, but the magnitude varies depending on whether gold is bought as jewellery or bars and coins.
The report assesses gold demand from a range of perspectives, both quantitative and qualitative. It considers the findings of a comprehensive analysis of the long- and short-run determinants of Indian gold demand and examines demographic, socio-economic, and related developments that are likely to shape gold demand in the country, now and in the future.
The econometric analysis shows that rising income is the most powerful driver of Indian gold demand in the long term, which bodes well for Indian gold demand as the economy is complemented by a strong demographic dividend. However, Indian demand faces short-term challenges from declining household savings rate and agricultural wages. It is also impacted by policy measures support which is currently lacking as policy makers view gold demand solely through the prism of imports. Additionally, the report highlights that the industry efforts towards improving trust, transparency and consumer awareness need to be more cohesive.
Somasundaram PR, Regional CEO, India, World Gold Council, commented; “Our latest research reinforces the fact that the drivers of gold demand in India are many and varied. Cultural affinity, long-held tradition and festive gifting clearly play significant role. However, these qualitative factors are complemented by quantitative aspects, which have jointly shaped India’s demand for gold over the last three decades, such as household income, the gold price, and inflation, which is a key issue facing investors in India today.
"The report is based on a comprehensive econometric analysis that highlights the most potent drivers of Indian gold demand in the short and long term. It further delves into aspects of Indian demographics and economic development at a crucial juncture, helping us understand gold demand today as well as in the future.
"We, at the World Gold Council, are confident that these findings will shape industry strategy around reinforcing established conventions and developing new ways to attract and sustain demand in the future”.
On the outlook for future gold demand in India, the report said demand for gold may be more subdued than expected this year, following India’s prolonged battle with COVID-19.
"However, imports remain strong and retail demand is expected to pick up, as restrictions are gradually lifted across the country. In 2022, economic growth and the impact of pent-up demand for gold are likely to herald a period of robust demand, although any future outbreaks of coronavirus could create further uncertainties.
"Looking ahead, it would appear that if the industry takes steps to become more transparent, more standardised and more in line with global peers, India’s gold market would most likely benefit from positive demographics and socioeconomic changes," the report said.
According to it, three focus areas which would allow gold to retain its long-held position as a valued asset across India are:
--Trust: Mandatory hallmarking, good delivery standards for gold bars and a gold spot exchange will drive a sea change in the Indian gold market, building trust among consumers and investors alike
--Education and awareness: An orchestrated campaign explaining how to buy gold could inspire many potential gold investors, especially if this included products that accommodate small incremental investments.
--Innovation: Digital tools, such as online platforms, robo-advisors, mobile applications, and e-commerce platforms, will drive accessibility and put gold on a par with other investment assets.
The report said that, in general, jewellery demand is more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax.
Consumption patterns also differ between rural and urban consumers. Jewellery is considered both an investment and adornment in rural areas. City dwellers tend to consider bars and coins as their preferred forms of investment.