(Kitco News) -China’s insatiable appetite for gold has garnered considerable attention this year; however, one bank is warning investors to pay attention to another important market that could continue to support prices through the second half of the year.
In a note published Sunday, Soni Kumari, Commodity Strategist, and Daniel Hynes, Senior Commodity Strategist at Australian bank ANZ, said they expect to see solid demand in India this year, even as prices remain elevated. Traditionally, India—the world’s second-largest gold-consuming nation, just behind China—is fairly sensitive to the price of gold, meaning that demand tends to drop off as prices rise.
However, ANZ noted that this has not been the case in the first half of 2024.
“Our calculation suggests that gold demand has tended to fall by 0.6% for every 1% increase in price,” the analysts said in the report. “Higher prices are still dampening demand, but sensitivity has diminished over the past year. Despite a rise in gold’s price of more than 10% in 2023, consumer demand stayed buoyant at 760t, a marginal decline of only 2% y/y. The demand was also in line with the long-term (2013–22) average of 755t.”
ANZ added that in the first five months of this year, gold imports into India increased by 26% y/y to 230t even as prices hit a record high above $2,450 an ounce.
Kumari and Hynes said that structural shifts in the nation’s economy are helping to support physical gold demand, even as prices remain high.
“Higher capital gains and income growth have helped gold demand weather elevated prices. Since India’s gold demand is largely driven by physical demand, particularly of jewelry, rising per capita income will be a key driver in the long term,” the analysts said. “The country is on the cusp of economic expansion, which is expected to lift per capita income by more than 60% to USD 4,000 by 2030. There are other demographic changes like urbanization, an increasing middle-income group, and a falling rate of dependency, which can outweigh any negative impact of high gold prices.”
At the same time, and driving near-term demand, a robust monsoon season between June and September will mean farmers will see better crop yields and have more money to buy more gold.
Also helping improve consumer demand, ANZ said that there were growing expectations that the government would start to lower gold import fees, which would help lower some of the costs.
“India’s current account deficit (CAD) of 1% leaves room for a change in gold’s import duty in the next Union Budget, and the industry is calling for a 5% cut,” the analysts said. “Should this materialize, gold imports will see a significant jump.”
Finally, The Reserve Bank of India has also started diversifying its foreign reserves, buying more gold. The central bank bought 37 tonnes of gold in the first half of the year.
“The RBI has become the second-largest gold buyer this year, replacing the People’s Bank of China. The buying volume in H1 implies the total addition this year could hit above 70t if the pace of buying continues,” the analysts said.
In this environment, as India and China continue to play important roles in the gold market, Kumari and Hynes said they expect gold prices to push to $2,500 an ounce by the end of the year.
