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According to a recent note by ANZ Bank, Indian gold demand could help extend the current gold rally and push the price of gold to $2,500 and beyond.

India ranks as the world’s number-two gold market behind China.

Gold prices have surged to record highs in both dollar and rupee terms. Indian buyers tend to be price sensitive, putting off purchases when prices climb. But the trend seems to be shifting.

Indian gold demand surged during an important festival in May. According to the World Gold Council, gold buying was brisk in both urban and rural areas.

According to ANZ analysts, that momentum appears to be carrying forward. Despite elevated prices, they project solid demand through the rest of the year.

“Higher prices are still dampening demand, but sensitivity has diminished over the past year. Despite a rise in gold’s price of more than 10 percent in 2023, consumer demand stayed buoyant at 760 tons, a marginal decline of only 2 percent y/y. The demand was also in line with the long-term (2013–22) average of 755 tons.”

Through the first five months of 2024, gold imports into India increased by 26 percent year-on-year, with 230 tons of gold flowing into the country. This is despite record-high prices.

According to ANZ analysts, economic growth and structural shifts are supporting gold demand.

“Higher capital gains and income growth have helped gold demand weather elevated prices.” 

India’s gold market is primarily supported by demand for physical gold, particularly in the form of jewelry. Indian jewelry is typically made from pure 24-karat gold. It is considered an investment as much as an adornment.  

ANZ analysts say rising per capita income in India’s emerging economy will be “a key driver” for the gold market in the long term.

“The country is on the cusp of economic expansion, which is expected to lift per capita income by more than 60 percent to $4,000 by 2030. There are other demographic changes like urbanization, an increasing middle-income group, and a falling rate of dependency, which can outweigh any negative impact of high gold prices.”

There are also some bullish factors in place for the short term.

The India Meteorological Department projects a good monsoon season with above-average rainfall over much of the country. This will likely result in increased crop yields, putting more money in the pockets of farmers. With gold serving as the primary asset to store wealth in rural areas of the country, this will likely boost gold demand.

According to ANZ analysts, there is also speculation that the government will lower the import duty on gold in the near future.

“India’s current account deficit of 1 percent leaves room for a change in gold’s import duty in the next Union Budget, and the industry is calling for a 5 percent cut. Should this materialize, gold imports will see a significant jump.” 

Meanwhile, the Reserve Bank of India has been on a gold-buying spree. The Indian central bank added 37 tons of gold to its reserves through the first half of the year.

The RBI has been buying gold since 2017. Over that period, the central bank increased its gold holding by over 260 tons. 

An Indian economist told the Times of India that the push to accumulate gold was based on both political and economic reasons. He said that the "reliability" of the U.S. dollar has "diminished." He noted the "noticeable decline" in the confidence in U.S. dollar assets.

Another economist told the Times, “It makes a lot of sense (to invest in gold), given the increased volatility in the FX market, elevated interest rates in the U.S., and, of course, also as the central banks in each economy would like to diversify the asset classes in which they are parking their reserves.”

India recently transported 100 tons of its gold from the UK back into India.

Indians have historically had an affinity for gold. Indian households own an estimated 25,000 tons of gold, and that likely understates the amount given the large black market in the country. Gold is deeply interwoven into the country’s marriage ceremonies and cultural rituals. Indians have long valued the yellow metal as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from beyond the urban centers, where large numbers of people operate outside the tax system.

Gold isn't considered a luxury in India. Even poor Indians buy gold. According to a 2018 ICE 360 survey, one in every two households in India had purchased gold within the last five years. Overall, 87 percent of Indian households own some gold. Even households at the lowest income levels in India hold some of the yellow metal. According to the survey, more than 75 percent of families in the bottom 10 percent of income managed to buy some gold.

The yellow metal was a lifeline for Indians buffeted by the economic storm caused by the government's response to COVID-19. After the Indian government locked down the country, banks tightened credit to mitigate the default risk. Unable to secure traditional loans, Indians used gold to secure financing. As Indians endured a second wave of lockdowns, many Indians resorted to selling gold outright to make ends meet.

Solid gold demand in India is indicative of a trend we’ve been seeing with gold flowing from the West to the East. While investment demand in Europe and North America has been tepid, investors in Asian countries have been gobbling up gold.

Along with India, gold buying in China, the world’s largest gold market, has been robust. Vietnamese and Thai investors are flocking to gold despite long lines and high prices. And gold is flying off convenience store shelves in Korea.

When Western investors hop on the bandwagon, we could see another big surge in demand, pushing prices even higher.

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