Economy
Why the October surge in gold imports should be watched
Summary
- In the past decade, India’s gold imports in volume terms have moved to a lower trajectory, aiding fiscal management. The latest surge, if it continues, could undo some of these gains.
India has historically been a gold-loving nation, though there’s been some tempering of those tendencies. In 2010, India accounted for 30% of the world’s gold demand, according to the industry body World Gold Council. Since then, India’s gold demand has dropped even in absolute terms, and its global share fell to 23% in 2022. This has helped India on key fiscal management metrics. But in October, gold imports spurted at a rate that, if it continues, could undo some of the previous gains from the drop in gold demand.
This October, leading up to the festive season, India’s gold imports amounted to $7.2 billion, against an average of $3 billion in the preceding 12 months. This was the second-highest monthly figure in nine years, after $8.5 billion in March 2021. The October surge came amid gold prices swinging in a 6% range between 15 September and 15 October. Gold traders reportedly used the lower prices to stock up for Diwali, which fell in November this year.
Indian governments are wary of such spikes in gold imports. India's goods imports (what it buys from the world) have always exceeded its goods exports (what it sells to the world). A ballooning deficit has many knockdown effects, notably weakening of the Indian rupee. The two biggest reasons for this deficit are imports of crude oil (a necessity) and gold (a discretionary item). In 2022-23, the contribution of gold to the goods trade deficit was the lowest in seven years, but the latest spike will pressure the 2023-24 figure.
Losing momentum
When it comes to investments with variable returns, the very nature of investor behaviour means there is an element of “momentum investing" embedded in them. For significant periods, demand tends to move in tandem with prices. Thus, when prices rise, so does demand. But in the case of gold, India’s imports, while still sizeable and more than any other country, have been declining or remained stagnant, even as gold prices have been rising.
Between 2010 and 2022, the US dollar-denominated price in international markets of gold has increased by 47%. In India, as the rupee kept losing value to the US dollar, gold prices in rupee terms increased by nearly 2.5 times in the same period. However, gold imports have not followed. In fact, India’s gold imports in volume terms have steadily drifted to a lower trajectory—from 1,002 tonnes in 2010 to 857 tonnes in 2015 to 774 tonnes in 2022.
No silver lining
One possible reason for the drop in gold imports could be investment or consumer interest shifting from gold to another precious metal. To examine this, we looked at demand trends for silver. Data from the Indian ministry of commerce and industry shows that, as with the case of gold, even imports of silver spiked this October. At $1.3 billion, this was the highest monthly figure since 2016, almost 10 times the $131 million average for the preceding 12 months. The next biggest month for silver imports was July 2022, with $1.1 billion.
Over a full-year time-frame, barring 2022-23, a spike in silver imports is not observed, and demand for silver has largely moved within a band. Further, silver imports have remained a fraction of gold imports. Silver imports were about 15% of gold imports in 2022-23, but in other years, it has typically remained in single digits.
Physical first
Let’s then examine the increased interest in gold in a financial form—via gold exchange-traded funds (ETFs) sold by mutual funds—rather than a physical form. Assets under management (AUMs) in gold ETFs have increased about 3.6 times between March 2016 and March 2023, to about $2.7 billion. But this is a fraction of annual gold imports and some of the increase is due to rising prices. Also, their share in overall mutual fund AUMs remains below 1%.
In other words, neither silver nor gold ETFs explain the long-term decline in gold imports in volume terms. It’s more contained within demand for gold itself, and is also why the October surge becomes a figure of attention. With overall goods exports under pressure, and growth in services exports flat, big additions to the trade deficit on account of a discretionary item can be uncomfortable.
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