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Facing Facts: Outlook for India’s Gold Demand Remains Robust, While China Slows on Sluggish Economic Growth
Mon Oct 14 2024
Jewellery demand in the world’s largest physical markets, China and India, contracted, while investment demand leapfrogged in the first half of the year. Collective demand has grown on a year-on-year (y-o-y) basis, but at a slower rate of 4%.
While India’s demand is projected to remain robust – on the back of cheaper gold prices as the Indian government slashed import duty by 9% in July, a favourable monsoon and anticipated strong economic growth – China’s outlook remains concerning as the country is experiencing slower growth and turmoil in the real estate sector. We estimate total demand to increase by 10% annually in India and by only 3% in China.
Looking into quarter-on-quarter demand, first-quarter jewellery demand was slightly lower than in 2023. Chinese New Year falls in Q1, traditionally bringing buyers into jewellery shops. People celebrate the occasion usually by gifting for other social and cultural purposes. We estimated first-quarter demand for jewellery at 171 tonnes, a fall of 8% y-o-y. However, the fall in the second quarter was much sharper, as demand contracted by 30% y-o-y to 92 tonnes. And although the second quarter is usually a seasonally weaker period, offtake was particularly poor.
Investment demand registered a gain of 70% y-o-y, totalling 175 tonnes. This was the highest-ever purchase by China in H1. This surge was fuelled by growing domestic economic concern coupled with an expectation of US rate cuts. Gold’s record 15% rise in price during the first two quarters created a lot of enthusiasm among Chinese investors who preferred to put their bets on gold, while other assets, including equities and bonds, delivered low to negative returns. Chinese retail investors not only purchased gold in the physical market but also invested in ETFs, which are, again, backed by physical gold. This massive investment demand made a significant contribution to the rise of global gold prices.
India
India’s jewellery demand contracted as well, albeit at a slower rate in the first half of the year. Demand contracted by 5% to 193 tonnes compared to 205 tonnes in the previous year. High gold prices, a seasonally weak second quarter, the General Election and decreasing rural income contributed to the fall. Considering that metal prices hit an all-time high, the Indian jewellery market showed reasonable resilience, suggesting that prices were not such a big deterrent for consumers when buying gold jewellery, arguably considered an auspicious metal and a store of value.
Recent GDP data shows that Gross Value Added (GVA) growth in agriculture and allied activities slowed down to 2.7%, at constant prices, in the April to June quarter of the current fiscal year, compared to growth of 4.2% during the same period of the previous year.
Extreme heatwaves and lack of rain have impacted the crop output. India’s agriculture sector employs more than 40% of the workforce and contributes about 15% of GDP. A Reuters survey in January this year shows
rural income contracted by 25% in three states from pre-Covid years, while monthly average food spending increased by 12%.Any slowdown in this sector has a direct impact on discretionary spending, although gold is a traditional store of value for the rural population. By contrast, India’s urban economy has done exceedingly well, which has resulted in high private consumption. Indians bought more SUVs in 2023 than in the previous year, and Apple opened stores in two major metros, pointing towards the rising middle class’s inclination towards high-value luxury goods. This changing buying pattern can also be attributed to an increase in investment demand for gold in the form of coins and bars, counterbalanced by the slowdown in the jewellery segment.
India’s investment demand in the first six months of 2024 registered growth of 42% y-o-y to 79.5 tonnes, arguably the strongest first half since 2015.
Outlook for H2
Economic and political factors have influenced China’s retail investors to move extensively into gold investment. Gold is always a safe asset. The government’s crackdown on the real estate sector, followed by the change in regulations regarding investment in other assets such as cryptocurrency, encouraged investors to switch to gold. The World Bank observes that China needs ‘policy support’ for the property sector, including restructuring property developers’ debt to boost household confidence. We expect investment demand to continue to remain robust in H2, while the jewellery sector may continue to struggle.
We estimate China’s jewellery demand to contract 11% y-o-y in the second half of the year and investment demand to grow 30% y-o-y. Cumulative demand is expected to stay around 896 tonnes, a modest rise of 3% y-o-y. India’s economy, on the other hand, is expected to grow around 7% in the current fiscal year. This is based on the Indian government’s commitment to continue its public infrastructure spending programme, a favourable monsoon which is expected to support rural income, and inflation having already come down to the Reserve Bank of India’s (RBI) target level. Against this backdrop, we assume that Indian households will indulge in heavy buying of gold during the festive season, which has already kicked off and will continue until November. The slashing of import duty on gold by 9% in the Union Budget has made gold prices cheaper, and any correction in the global price will further boost the sentiment of consumers. We estimate India’s jewellery demand to grow 13% y-o-y in the second half of the year and investment demand to grow 18% y-o-y.
Cumulatively, we estimate the annual demand to stay around 750 tonnes, a rise of 10% y-o-y.
Source: LSEG Workspace