GOLD RUN: As prices touch record highs, new trends are emerging in sale, purchase, gold loans and yellow metal as an investment option

Vijay C Roy

Chandigarh-based Jyoti Mehra (28), an HR executive, had been saving to buy gold on Akshaya Tritiya, an auspicious occasion to buy yellow metal and the second biggest gold-buying festival after Dhanteras. However, the high prices acted as a stumbling block. She opted to wait and watch. The surging gold prices have led to many like Jyoti either withholding purchases, or resorting to symbolic buying of gold coins or small jewellery items to mark the occasion.

As pure gold hovers over Rs 70,000 per 10 gm, demand has fizzled out. According to jewellers, most consumers are buying gold only to meet urgent requirements, but are otherwise staying away from discretionary purchases. Higher vigilance during the election model code of conduct has also affected sales.

Jewellers say that high prices and inflationary pressure have reduced demand in terms of volume and weight. As a result, low-caratage jewellery is being preferred. “Demand has fallen anywhere between 85-90 per cent, as buyers take a pause amid high prices. Customers apprehend that prices could fall sharply, considering the big price rally of the last two months starting March,” says Pankaj Arora, national president of the All India Jewellers and Goldsmith Federation.

Reports suggest that the high gold price has also limited the appetite of jewellers to build inventories. According to estimates, there are 3.85 lakh to 4.1 lakh jewellers in India. “Of them, roughly two lakh are in the organised sector,” points out Arora.

In India, the ideal demand for gold hovers between 700-800 metric tonnes annually. According to the World Gold Council (WGC) data, last year, the price rise led to decreased jewellery sales and a drop in domestic gold consumption by 3 per cent to 747.5 tonnes as compared to 2022.

Why prices are rising

Domestic prices of pure gold (24 carat) hit a record high of Rs 73,958 per 10 gm in April. The first three months of the year have seen a rise of around 15 per cent, after an increase of more than 10 per cent in 2023. According to WGC, Indian gold consumption in the January-March quarter rose 8 per cent to 136.6 tonnes, as investment demand jumped 19 per cent and jewellery demand rose by 4 per cent.

The demand was further fuelled by the Reserve Bank of India’s robust gold purchases during the period. Usually, gold and equity market returns have an inverse relationship — if equity delivers positive returns, gold prices are muted. However, at present, the stock market and gold prices are at an all-time high. So, what are the factors that are propelling gold prices?

Depreciation of rupee: Globally, gold is denominated in US dollars. Since the value of the rupee compared to the dollar has historically fallen over time, this means that even if the price of gold remains stable in USD, it becomes more expensive for Indians due to the weakened rupee.

Rate cuts by the US Fed: Generally, when interest rates are high, gold becomes less attractive. It is expected that the US Federal Reserve will announce the first interest rate cut in June. This could make gold a more attractive investment option, leading to a rise in demand and price.

Geopolitical developments: The world is currently experiencing turbulent times due to conflicts like the Russia-Ukraine war and tensions in the Middle East. This uncertainty is driving investors towards gold. Even central banks of some developing countries, including India, are increasing their gold reserves, signifying their trust in gold as a reliable asset during uncertain times.

Increased demand from China: The Chinese central bank has been adding a substantial quantity of gold to its reserves, which is leading to an increase in gold prices in the US and India. Also, gold buying is becoming popular among young Chinese, which is also driving the purchases.

China dethroned India as the world’s top consumer of gold jewellery in 2023. Its gold consumption rose to 630 tonnes in 2023, surpassing India’s consumption of 562.3 tonnes. In 2022, India’s gold jewellery demand stood at 600.56 tonnes, making it the leading market for gold globally. China’s demand stood at 570.8 tonnes.

Buoyant loan market

An increase in gold prices can lead to higher loan values for borrowers, potentially increasing liquidity in the economy. However, it also increases the risk of default if borrowers are unable to repay their loans. The trajectory of gold in the past four years shows that prices have only gone up, encouraging people to pledge gold to meet personal or business needs.

The interest rates on gold loans, availed by pledging gold, are notably lower than other types of loans, ranging between 8-26 per cent per annum. Additionally, banks and financial institutions offer gold loans of amounts ranging from Rs 1,500 to Rs 1.5 crore, with repayment tenures spanning three months to four years.

Taking out gold loans at this time could be beneficial because gold prices are rising. Borrowers may be able to obtain a bigger loan amount. When gold prices surge, there is a corresponding increase in the demand for gold loans, primarily due to the enhanced value of the collateral. Conversely, during periods of low gold prices, the demand for gold loans may decrease as borrowers adopt a wait-and-watch approach, anticipating a future uptick in gold prices.

NBFCs make a killing

Non-banking financial companies (NBFCs) focusing on gold loans have maintained a reasonably resilient market share despite intense competition from banks. The market share of gold-loan NBFCs has been resilient at 61 per cent between March 2021 and September 2023. Overall, the gold loan credit rose to Rs 2.5 trillion as on September 30 from Rs 1.9 trillion as on March 2021, a report from CRISIL Ratings showed.

While NBFCs are known for their servicing agility, banks have focused on borrowers seeking bigger loans and competitive interest rates.

“Gold-loan NBFCs have bolstered clientele and managed growth by opening branches in new geographies, offering online gold loans and doorstep services, and deploying marketing strategies to target inactive customers,” says Malvika Bhotika, director, CRISIL Ratings.

The discipline on loan-to-value (LTV) and auctions remains high as gold-loan NBFCs maintain a sharp focus on risk management. As per the RBI norms, banks or gold-loan finance firms can provide only 75 per cent of the value of the jewellery. However, relaxation was provided during the Covid-19 period to mitigate hardship.

Shaji Varghese, CEO, Muthoot FinCorp Limited, says Indian families have overcome the stigma of pledging gold, and have started to explore buying gold for investment and liquidity purposes. “In FY 2023-24, the average ticket size of the gold loan was around Rs 65,000 and around 15 per cent of customers availed first-time credit,” he adds. Considering the current scenario, the prices of gold loan will remain elevated in the near future.

Way forward

Over the long term, income and price are the main drivers of gold demand in India. 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 expected to get a boost. Domestic consumption will be driven by the demand for bridal jewellery, with impulsive purchases for everyday use likely to be limited.

Impact of surge in gold prices

Increase in CAD: Since India is one of the largest importers of gold, when prices rise, the value of gold imports increases, leading to a widening of the current account deficit or CAD.

Increase in import bill: Higher gold prices lead to an increase in the import bill for gold, which affects India’s trade balance. The increased import bill puts pressure on foreign exchange reserves and can impact the overall stability of the economy.

Jewellery industry: Higher prices can lead to increased production costs for jewellers, affecting profit margins. It may also lead to a shift in consumer preferences towards alternative jewellery material. High gold price has also limited the appetite of jewellers to build inventories.

Impact on sales: Consumers buy gold only to meet urgent requirement but otherwise largely stay away from discretionary purchases. Also, jewellery recycling sees a rise, which can curb imports.