Caution Replaces Confidence As War Clouds Cast A Shadow

It is often said that a week can be a long time in politics. The same probably holds true for the gold business in India!

During the first few days of October, it seemed that a wave of confidence was sweeping through the industry. Premiums on gold reportedly touched an almost 18-month high on the back of sustained buying by traders and manufacturers. In the previous eight weeks two large all-India B2B shows had seen vigorous ordering by retailers with an estimated combined turnover of almost Rs 90,000 crore.

This buoyant, if not completely bullish, sentiment was being driven mainly by anticipation of strong consumer demand during Q3 FY 2024. This is the quarter with multiple festivals, including Dhanteras, one of the most auspicious days for buying gold in India. Soon after, the wedding season begins, generating another strong demand wave. 

Sentiment had soared further due to a significant dip in prices, down to an almost seven-month low at levels of Rs 56,000 per 10 gm by September end. 

All that changed suddenly on October 7! 

On that day, the totally unforeseen outbreak of a fresh round of hostilities in the Middle East brought gold’s safe haven properties to the fore, once again driving up prices as investors sought some semblance of stability.

What will this mean for the industry during the forthcoming season in India? 

Let us first consider the worst-case scenario. The economic impact of the war, especially higher oil prices, and further inflationary pressures, could impact disposable incomes and dampen enthusiasm. Continued political uncertainty could drive gold prices higher still. The dual demand-supply squeeze would definitely put the jewellery industry in a bind.

To make matters worse, a poor festive season would add to the woes of a slow H1 2023. According to estimates from Metals Focus, a precious metals consultancy that tracks key markets, jewellery consumption in India had dipped 12 per cent year-on-year during this period, while fabrication demand fell by an even steeper 18 per cent. In August, the World Gold Council, while releasing figures for Q1 FY 2024, had reported an 8 per cent decline in jewellery demand in volume terms. 

On the other hand, if the war has only a limited impact, and if the US does not slip into a full-fledged recession, investor interest in the yellow metal may plateau out. Prices may continue to remain below Rs 60,000 levels. 

In such a case, buyers may regain some confidence and markets may show an upward trend, though still below earlier expected levels. The somewhat better-than-expected monsoon may also give a push to rural demand. Festive sales in that case may still be disappointing, but not disastrously so. 

Ironically, irrespective of which way the market moves this season, trends seen in the jewellery industry in recent years are likely to get further consolidated.

Some of these include:

• Further strengthening of the organised sector, already dominated by large regional and all-India chains that already have sizeable market share. This process has been further aided by policies like mandatory hallmarking, implementation of GST, cap on cash purchases and so on. 
• Small players can thrive only by developing expertise in a niche area and adopting levels of professionalism and transparency similar to the large companies
• Jewellery purchases will more and more be driven by current fashion trends and design rather than being a pure investment-led decision.
• Rise in the demand for lightweight jewellery – large pieces, even chunky looks but with lower gold content. WGC estimates that per capita consumption of gold in India has dropped from 0.81 gm in 2010 to 0.54 gm in 2022.

Of course, a lot can happen over the next few weeks when festive sales peak. For, as we observed at the beginning of this piece, that translates into a very long time where changes in the gold industry are concerned. 

(The author has been a journalist since the mid-1980s)