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Despite record-high prices, Indians are holding on to their gold.

Since the beginning of the year, gold has soared by 44 percent in rupee terms. That’s on top of a 21 percent gain last year.

High prices typically lead to increased selling and a surge of scrap metal into the market to satisfy increased demand on the buying side. For instance, when the yellow metal crossed $3,000 an ounce in March, Indian investors rushed to sell and book a profit. That led to a bug increase in scrap supply.

But with the recent record highs, that hasn’t happened.

Why not?

Indians believe gold prices will rise even higher.

Harshad Ajmera of wholesaler JJ Gold House in Kolkata told Reuters Indians believe prices could rise to ₹125,000 per 10 grams. (Gold is currently trading around ₹111,000 per 10 grams.)

A surge in scrap gold supply during periods of rapidly rising prices often results in discounted premiums. But with more people holding on to their gold, that’s not happening. There have been narrowing domestic price discounts in recent weeks. We even saw a brief period with a marginal premium in late August. The World Gold Council notes, “This marks a noteworthy change, as domestic gold prices had been trading at a near-sustained discount since December."

Reuters called the limited scrap supply ahead of festival season “a boon for banks,” as jewelers turn to them to meet demand from imported gold.

A Mumbai-based jeweler with a bullion-importing bank told Reuters that limited supplies are allowing banks to charge a $1 premium, even with record-high prices.

Without a surge in scrap to feed growing demand, gold imports have increased over the last couple of months. August imports totaled $5.2 billion, a 37 percent month-on-month increase. The World Gold Council estimates India imported between 60 and 65 tonnes of gold. That was up from between 42 and 48 tonnes in July.

Gold demand could get a further boost from a reduction in the Goods and Services Tax that went into effect on Sept. 22. 

Strong demand for gold and the lack of selling contrasts sharply with the U.S. market.

American investors have been aggressively selling gold.

While gold bar and coin demand increased by 11 percent globally in H1, year-on-year bar and coin demand in the U.S. plummeted by 53 percent. American investors bought a paltry 9 tonnes of gold coins and bars in Q2, the lowest quarterly total since 2019.

According to the World Gold Council, “U.S. net investor demand was again affected by a double whammy of elevated profit taking and subdued levels of new purchases.”

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. Many Indians use gold jewelry not only as an adornment but as a way to preserve wealth.

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