Gold demand at pre-Covid level in Q2

The demand for gold has bounced back sharply in India from the lows seen in 2020 because of the outbreak of the Covid-19 pandemic, and has even beaten the pre-pandemic level.

In the September quarter, the demand for gold jumped 47 per cent year-on-year (YoY) to 139.1 tonnes, as against 94.6 tonnes in the year-ago period, and higher than the 123.9 tonnes recorded in the pre-pandemic September 2019 quarter, the World Gold Council (WGC) said in its latest release.

In value terms, demand surged 37 per cent year-on-year (YoY) to Rs 59,330 crore during the quarter.

Gold jewellery demand jumped 58 per cent YoY to 96.2 tonnes due to strong pent-up demand, occasion-related gift buying, economic rebound, and soft gold prices.

Bar and coin investment demand, too, increased 27 per cent YoY to 43 tonnes.

Among regions, north India outperformed the south, as some southern states such as Kerala were impacted by higher number Covid cases that affected jewellery store operations, according to the WGC.

Typically, the July-September period is weak seasonally for gold demand because of the monsoons and perceived inauspicious periods like pitru-paksha, when buyers usually prefer to postpone gold purchases.

“This (surge) is primarily driven by what appears to be a firm grip on the pandemic with higher vaccination rates and falling infection rates, leading to a strong rebound in economic activity.

"Softer gold prices also generated significant consumer interest,” said Somasundaram PR, regional chief executive officer, India, WGC.

Another reason for the surge, according to the WGC, is the steady rise in inflation in India, with savers typically buying the yellow metal as a hedge.

“For each one percentage point increase in inflation, gold demand increases by 2.6 per cent.

"On the other hand, for each 1 per cent fall in the gold price in any given year, demand increases by 1.2 per cent,” the WGC said.

The WGC expects demand to rise further as economic activity returns to normal across most Indian states.

“With the upcoming festive and wedding season, there is all the more enthusiasm towards gold demand, and we anticipate it to be the busiest gold-buying season since the start of Covid.

"But the potential for further waves of Covid, which may require lockdowns, is an ever-present threat,” Somasundaram cautioned.

World view: ETF outflows

At the global level, gold demand dipped 7 per cent YoY and 13 per cent quarter-on-quarter to 831 tonnes, primarily due to outflows (27 tonnes) from gold-backed exchange-traded funds (gold ETFs).

Gold prices, meanwhile, averaged $1,790 per ounce (oz) throughout the quarter — down from the September 2020 quarter’s all-time high of $1,908 levels.

“A year ago, investors were flocking to gold, seeking a hedge against the pandemic.

"And gold ETFs were particular beneficiaries of these flows, adding more than 1,000 tonnes over the first three quarters of 2020.

"On balance, it appears the prospect of a higher interest rate environment is more of a concern than ‘transitory’ inflation,” said Louise Street, senior market analyst at WGC.

Street expects the full-year gold demand to be led by strong consumer and central bank purchases, which he feels will mitigate losses from ETFs.

“Jewellery demand will continue to exceed last year’s levels, but investment demand in total will be weaker in 2021, despite healthy bar and coin demand,” Street said.

Photograph: Rupak De Chowdhuri/Reuters