Gargi Shah is an independent analyst based in Mumbai, India, and was most recently a metals analyst with GFMS Ltd. (now Thomson Reuters GFMS), the London-based precious metals consultancy firm. She is a lawyer, and pursued a career in corporate law prior to entering the metals market as a commodities reporter for a national daily. JLN editor-in-chief Jim Kharouf spoke with her about India’s role in the gold market, the recent jewelers strike in India and China’s influence on the gold market. 

Q: Gold is interesting because there are many factors that impact gold prices – inflation forecasts and the value of the U.S. dollar, industrial demand, jewelry demand as well as central banks’ buying and selling of gold. That leaves the question: How would you prioritize this list of impacts on gold prices? In other words, which of these factors will be most important to gold prices going forward?

A: Jewelry and investment make up for something like three-fourths of the global gold demand, which make them the most influential elements in the price discovery of gold. The partnership between the two has, broadly speaking, resulted in a positive price trend for more than a decade (i.e. as investment in gold became popular – it drove the price higher – rising prices created a bullish atmosphere) that encouraged traditional jewelry buyers, such as [those] in India, to buy gold at ever higher prices, which in turn supported the price rise. Although, over time, jewelry did lose a significant share to investment. At the turn of the millennium, jewelry accounted for roughly 80 percent of the global gold demand which now stands at about 50 percent.

Now, the investor camp in turn grew for a variety of reasons ranging from the credit crisis, low interest rates, sovereign debt, inflation threat to fear of currency debasement, all making a sound case for investment in gold. Going forward, as long as the investment case for gold remains good, investment demand (particularly in the West) will primarily lead the course of the gold price. We have evidently seen over the past decade how faltering investment demand at a given point in time has resulted in the price to retract significantly. The recent pull-back to low $1,600s after it peaked at around $1,900 last year is one such example, as investment demand eased with the underplay of the sovereign debt issue.

Central bank activity has also become a major positive for the gold market, after they turned net buyers in 2010, through both their significant purchases last year as well as the pro-gold sentiment… If central banks continue to buy they can provide additional support to the price, especially when demand elsewhere eases.

Having suggested so far that only demand-side activities are important to the gold price, the passive support through restrained global scrap supply in the last couple of years cannot be dismissed. Not only has it helped counter the modest rise in mine production, but [it has] also spared the market from “surplus” pressure. Given the massive above-ground stocks of gold held in jewelry form, scrap has the potential to easily upset the investor-led rally, should the consumers find justification in selling back, which will render it a very important factor going forward.

Q: Gold also has a strong connection to India. Given your vantage point, living in India and as an analyst, what impact has India had on gold prices recently and from a longer time perspective?

A: We recognized that the investment and jewelry demand are critical to the gold price by virtue of their share of the total gold demand. Then India, which has been the single largest consumer of gold in both these forms for quite a while, by merit becomes an important region of the gold market, as its combined gold demand in recent years has come to account for around a third of the global total. Within India too, jewelry demand has lost a fair share to investment, but the former still constitutes for bulk of the demand.

Now, in a scenario where jewelry demand in the west had been suffering mainly due to poor economic conditions while elsewhere consumer spending could not keep up with the rise in the gold price, Indian jewelry demand overall proved to be rather resilient. This exceptional outcome was thanks to gold jewelry here being regarded as a means of wealth preservation and tied to age-old customs and traditions making some buying almost mandatory, such as for weddings. Interestingly, the bullish price environment not only gave confidence to Indian consumers to buy at ever higher prices in fact it made buying gold more pleasant! Rising prices also set off speculative and investment interest in gold.

Such buying may not have actively bidded up the price, as Indian consumers are known to be rather price sensitive. Nonetheless, every time Western-investment demand gave away causing the price to tumble, Indian consumers were quick to take advantage of the ‘discount’, thereby preventing the price from falling further. Overtime, the base price kept on rising clearing way for the Western investment-led rally to test new highs. It would have proved much harder for investment demand alone to push the price through multiple peaks without the massive orders from Indian gold traders.

Q: What impact have you seen on gold, if any, on the recent strike by jewelers in India? A recent Wall Street Journal story quoted the Bombay Bullion Association as saying April and May imports will be 30% below last year’s.

A: I don’t see the some 15- to 20-day strike period in India as any different from an otherwise similar period when demand is weak. During this time, the price did fall some 4 percent from around $1,700 to low $1,600s. Although it is hard to justify that it was purely on account of the strike, it may have been to some extent.

This year so far, both investment and jewelry demand in India have been considerably weak relative to the previous year. Savvy investors/speculators are finding the current price level in rupee terms of around Rs. 28,500 to 29,000 as an attractive price to disinvest, with limited fresh investment activity. The availability of local supply of gold through such disinvestment means that India needs to draw less from the international market through fresh imports. This could be one reason why imports could be lower, if so.

According to the Indian calendar there are relatively few auspicious days this year, which will result in a fewer number of weddings taking place in the current year. This will also have some bearing on jewelry demand. Having said that, Indian jewelry as well as investment demand were at record or near-record levels last year. So, any such expected weakness may also be due to a comparison with a strong period.

Q: What can we expect to see from a seasonality perspective in gold, due to the wedding season in India?

A: In the last 10 odd years, seasonality in demand has notably diminished. Demand is seen to be more or less consistent throughout the year, with the exception of periods when prices are considerably weaker or volatile. In other words, seasonality has been largely replaced with price sensitivity especially given the massive price oscillations intra-year.

Wedding demand, however, is critical in the months of March-April-May for the summer and October-November for the winter weddings. These months also include some of the other religious and festive days like Akshya Tritiya (in May) and Diwali (October/November). In that sense, June-July are typically lean months being the sowing period as well as the time when fresh terms start in schools and colleges, which curb consumer spending, as funds are used up to pay tuition fees.

Q: We’ve focused on demand in India. What might lead to a sell off in gold, and what impact would that have on global gold prices?

A: India is simply a deep golden pit, as it has consistently been a net buyer like any other consuming country, but only with much larger volumes. Indians have been pro-gold for a very long time, which has essentially been backed by gold’s own performance. They have been buying gold because the price has always risen, and therefore they believe that it will continue to do so in the future, notwithstanding short-term price weakness.

Given we are in a Western investment driven rally, which in turn is based on certain conditions in the industrialized economies, investors are very important. In the event that investors go to the sidelines in extreme conditions to liquidate their holdings, there will be lot of “homeless gold”! Such surplus in the market will without doubt put immense pressure on the gold price, especially given the ease with which tonnes of gold can be sold with just a click of a button.

As I said earlier, typically Indian traders would actively enter the market during bouts of price weakness that puts a brake on falling prices, due to the magnitude of their orders. However, should the scale and pace of the decline set off panic in the market (should the belief that gold prices will go higher in the future “fail”), massive liquidations, especially from the Indian investor fraternity, can follow suit adding more pressure to the falling prices.

I have often used this analogy for the analysis of the Indian gold market: How different can the outcome of an investor-led (referring particularly to Western investment) sell-off in the gold market be to the foreign-institutional-investor-led sell-off in the Indian stock market (following the collapse of the Lehman Brothers in 2008) that triggered panic selling amongst domestic investors? The benchmark SENSEX index tumbled from a peak of over 21,000 to below 8,000. Now, extrapolate that same behavior to the gold market, [and] I think you will find support for a similar outcome.

Q: Finally, China continues to be a major player and influence the gold market. What is your take on its influence? Will its central bank continue to buy? China now looks like a net importer despite being the largest gold producer. What does that mean for gold markets?

A: Chinese gold demand has grown rapidly and robustly in the recent years, thanks to its strong economic progress. Having nearly caught up with India, its jewelry and investment demand account for about a fourth of the global sum. The combined share of the two countries (India and China) stands to contribute more than half of the global demand for jewelry and investment, making them a gold power bloc. The Chinese gold market is quite similar to that of India and so it similarly influences the gold price.

China has to rely on imports to meet its growing gold demand as it far exceeds local supply through mine production and recycled gold. One way to put this would be that being the largest producer only means that it produces more compared to other gold producing countries. In terms of demand, what makes Chinese gold consumption important is that it is substantial and growing, whether it is met through local mine production or through imports.

Central bank buying in the recent years has essentially stemmed from the need to diversify official reserves mainly held in U.S. dollars. China has one of the largest U.S. dollar reserves, [and] at the same time, [has] low gold holdings, as is true for most of the developing countries. Given the recent trend in central bank activity, there may be scope for more reserve diversification prompted buying, although given the relatively small size of the gold market, such purchases will have limitations.

Note: All statistics are from Thomson Reuters GFMS and World Gold Council. Gargi Shah can be reached at

Shah also appeared in a February 2012 edition of 60 Minutes (below) titled “India’s love affair with gold”.

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