The World Gold Council (WGC) has warned that the demand for gold in India could drop to a three-year low in 2019. Local prices soared to a record high while rural earnings plunged because of poor weather conditions. About a third of the local demand for the yellow metal comes from the rural areas where it is considered a traditional store of value or wealth.
According to WGC’s managing director for Indian operations Somasundaram PR, consumption of the precious metal in the third quarter of 2019 was down to 123.9 tons which is around 33% lower compared to the same quarter of the previous year. He predicts a total annual decline of 8% for 2019. This is the lowest level since 2016.
The local prices of gold futures have already increased by around 22% in 2019 and reached a record high in September at 39,885 rupees per 10 grams. The price hike was compounded by the increase in import duty imposed by the government in July. These significantly reduced gold demand in the third quarter.
Somasundaram added that the demand for gold was affected by weak market sentiments in the rural areas. India experienced a 25-year high monsoon rainfall in the third quarter which damaged most of the crops that were already ready for harvest including soybeans, cotton and pulses.
Many locals are taking advantage of the price hike to make profits from selling their gold ornaments. This trend could increase the supply of scrap gold to 38% to about 120 tons in 2019, according to the WGC.
The demand for the yellow metal in India usually peaks in the fourth quarter because of festivals such as Diwali and because it is the wedding season. Locals believe that buying gold during this time can bring good fortune. However, Somasundaram expects the demand to be lower than the previous year which was 236.5 tons.
On the bright side, the weak demand in the second-largest gold market in the world is not all bad news for India. The lower import could reduce the trade deficit which would, in turn, strengthen the rupee.