Kavita Chacko, Research Head, India, World Gold Council, says, “We anticipate that jewellery demand will predominantly centre around the festival season starting in the latter half of Q3. Interest in bars and coins is expected to continue.”

Gold prices hit a new all-time high in mid-May before pulling back due to profit-taking, ending the month at $2,343 per ounce—a 1% monthly rise. This added to gains of 9% in March and 5% in April. Prices further dipped to $2,317 per ounce in early June following a robust U.S. jobs report and a pause in gold purchases by the People’s Bank of China (PBoC). Despite these fluctuations, gold remains one of the best-performing assets this year, with a 12% return. Indian gold prices have mirrored international trends, supported by the stable USD/INR exchange rate.

The Akshaya Tritiya festival on May 10, traditionally a significant day for gold purchases, saw a brief surge in demand. However, gold buying, especially for jewellery, declined afterward, mirroring the tepid demand in March and April due to high prices. The record-high prices in mid-May further suppressed demand during the typical low season from mid-May to July. Nonetheless, there were reports of continued interest in bars and coins, fueled by positive investor sentiment towards gold as a valuable investment.

Kavita Chacko adds, “The current trend of subdued jewellery demand is expected to continue over the next few months with a potential uptick anticipated during the onset of the festival season in the latter half of Q3. Conversations with the industry suggest that manufacturers are choosing not to increase their inventories at this time but could build stock as early as August, with activity picking up steam as the quarter progresses. But investment buying through bars and coins is likely to persist in line with the current trend: from January to March, bar and coin demand rose by 19% year-on-year to 41 tonnes.”

The discount on domestic gold prices relative to international prices has reduced from $24 per ounce in March and $10 per ounce in April to $6 per ounce by mid-June. This decrease in the discount, even after Akshaya Tritiya, indicates ongoing interest in gold buying during what is typically a low-demand period.

Indian gold ETFs experienced a significant turnaround in May, with net inflows reaching INR 8 billion, a sharp contrast to the INR 4 billion outflows from the previous month and well above the 12-month average of INR 4 billion. This increase brought collective gold holdings to 46 tonnes, marking a monthly increase of 1 tonne and an annual rise of 8 tonnes. Additionally, the number of gold ETF folios grew by 136,772, reaching a total of 5.3 million, indicating sustained investor interest in gold as a financial asset.

The RBI’s gold purchasing activity has remained consistent throughout the year. According to RBI data and our estimates, the central bank acquired 3.7 tonnes of gold in May and an additional 2.8 tonnes in the first week of June, bringing the total gold purchases in 2024 to 30.6 tonnes. This has elevated the RBI’s gold holdings to a new high of 834.2 tonnes, which now constitutes 8.7% of the total forex reserves, a level not seen since April 2013.

Kavita Chacko, Research Head, India, World Gold Council, notes, “The RBI has emerged as a significant contributor to global central bank gold purchases this year, following Turkey and China. If the trend of gold buying seen in the first five months of the year continues, the RBI’s annual gold acquisitions could be comparable with the (net) 77.5 tonnes bought in 2021. However, the next few months will provide a clearer picture of the bank’s buying trend.”

Chacko further explains, “Alongside building its reserves, the RBI has been restructuring the storage of gold over recent years. According to its report on foreign exchange reserves, the central bank has been bringing some of its gold previously held overseas to India. This move appears to be motivated by logistical as well as strategic considerations and does not have financial implications, nor does it affect the RBI’s overall gold reserves. Furthermore, the government has granted the RBI an exemption from customs duty on gold imports.”

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Despite high gold prices, May continued the positive trend from April with gold import values reaching $3.3 billion, representing a 7% month-on-month increase but a 10% decrease year-on-year. In volume terms, it is estimated that gold imports in May were around 45 tonnes, up from 43 tonnes in April but significantly lower than the 63 tonnes imported in May 2023 when prices were 20% lower.

Chacko’s research attributes the rise in gold prices to factors such as a decline in bond yields, expectations of an easier monetary policy, geopolitical tensions, and weakness in the US dollar. However, the impact of these factors varied across currencies, with the Indian gold price influenced by the stable domestic currency.

Indian gold ETFs continue to attract sustained inflows, reflecting growing investor interest supported by strong price performance. In contrast, the Reserve Bank of India (RBI) has paused its gold purchases in November after being a net buyer for eight of the first eleven months in 2023, adding 16.2t to its gold holdings.

Kavita said ”RBI data and our estimates indicate that the central bank did not purchase gold in November,15 the first pause in six months. During eight of the first eleven months of 2023, the RBI has been a net buyer of gold, adding a total of 16.2t to its gold holdings. This is however notably lower demand than previous years. Annual net gold purchases by the RBI averaged 47t from 2018 to 2022.16 The central bank’s gold reserves as at the end of November are estimated to be 803.6t. During 2023, it has been buying an average 1.5t of gold per month.”

Despite India’s robust economic growth driven by healthy consumption demand and government investment, the high gold prices have affected the domestic gold market. Anecdotal evidence indicates lower purchases during the busy wedding season, with jewelry sales volumes taking a hit. The high gold prices have also limited jewelers’ appetite to build inventories, leading to increased jewelry recycling and potentially curbing imports.

Chacko highlighted that the World Gold Council’s econometric analysis shows that over the long term, income and price are the main drivers of gold demand in India. Rising income positively correlates with gold demand, while higher prices have a dampening effect. Looking ahead, jewelry demand may struggle to rebound in the current high-price environment, but investment demand is expected to receive a boost from favorable domestic economic growth prospects.

High gold prices and soft demand have reduced the volume of gold imports, despite a 35% increase in import value. Cumulative imports for the first ten months of 2023 were 2% higher y/y in volume but 12% higher in value, mainly due to the 15% y/y increase in prices. Monthly import volumes fluctuated, with a notable increase in Q3 attributed to the festive season.

Kavita said ”Looking ahead, jewellery demand may find it difficult to rebound while the high price environment remains. At the same time, investment demand for gold is likely to get a boost, supported by the favourable domestic economic growth prospects and the trend of growing domestic investment inflows amidst the prevailing global geo-political and economic uncertainty.”

As of late October 2023, domestic gold prices in India have been trading at a discount to international prices, reflecting subdued local demand. Despite the steep discount, the demand scenario remains muted, with physical demand impacted not only in India but also in other regions, such as China, where premiums have narrowed from previous highs.