Why India Will Have a Huge Impact on Gold Prices in 2021 and Beyond

Dear Retail Investor,

I spent the entire year of 1993 backpacking through India.

Talk about culture shock – my senses were constantly under assault.

Beautiful women in vibrant saris…Pungent aromas of spice and incense…Bollywood music blaring from rooftops…

But what really stood out was the abject poverty.

For a week or so I stayed at a friend’s high-rise apartment in Bombay (which is now called Mumbai).

The morning after arriving, I awoke to discover that an encampment of about 50 families had sprouted up overnight across the street.

This, my host told me, happened all over the country every single day.

As you might imagine, I also encountered countless beggars during my time in India.

Of course, not everyone in India is poor.

In fact, the country now boasts 119 billionaires – that’s 110 more than there were in 2000.

And according to Oxfam, the country produces 70 new millionaires every day.

So it’s no surprise that the disparity between rich and poor in India is astounding (the top 10% of the country’s population accounts for 77% of its total wealth).

But Indians rich and poor have one thing in common

They love gold.

You see this in living color during Hindu weddings in India.

These are boisterous affairs that typically last for three days or more (I suffered more than one sleepless night because of them).

To say they’re elaborate would be a huge understatement.

They’re expensive, too.

In fact, they’re so expensive that families sometimes start saving decades in advance of one.

No Indian wedding is complete without gold

Virtually everyone wears gold at Hindu Indian weddings – especially the brides.

They’re practically dripping with the precious metal.

You’ll see it in their hair accessories, nose rings, earrings, necklaces and amulets.

“Sometimes (it’s) to the point where you’ll see more gold than their face.”

That quote comes from Somasundaram PR, the managing director of the World Gold Council in India.

According to the Council, India is the second leading consumer of gold behind China (Indians consume an average of four times more gold than Americans do annually).

Most of the gold used in India comes in the form of jewelry, which is the traditional way Hindus store and display their wealth.

Weddings aren’t the only Indian events that call for gold

The metal also makes a big splash at important Hindu festivals like Diwali.

During this holiday, it’s considered auspicious to give gold coins as gifts.

It’s worth noting that Diwali is held every fall, as are a dizzying array of other Indian festivals (there are 15 of them in November 2021 alone!).

Make no mistake – all those festivals and autumn weddings can be a huge driver for the gold market.

In fact, Indian demand for gold is expected to have a much bigger impact than usual this fall.

That’s because last year’s Covid-led lockdowns played a big role in slashing the country’s 2020 gold demand (it plunged 35% from 2019).

That came on the heels of a 9% reduction in Indian gold consumption in 2019.

Somasundaram attributed the 2019 drop to rising gold prices.

Now he expects Indians to buy gold with a vengeance in the second half of 2021.

The reason? Pent up post-lockdown demand and the expectation that higher gold prices are here to stay.

“We could see a strong spurt in gold demand for the next few years,” he said, “a repeat of what happened after a sharp drop in 2009.”

Other factors pointing to higher Indian gold demand include a reduction of the Indian government’s gold import tax from 12.5% to 7.5% earlier this year.

India’s not the only foreign country that could reignite the gold market

There’s also China, the world’s number-one gold consumer.

Like India, China’s gold consumption plunged in the wake of the pandemic.

Imports of the metal dropped from an average of $3.5 billion in 2019 to $600 million in 2020.

But I expect those numbers to shoot up.

That’s because in April 2021, China’s government relaxed controls on gold imports in order to bolster the state currency, the renminbi.

That paves the way for a massive increase in gold inflows.

Bottom line – China and India account for about 40% of the world’s gold purchases.

So when they dramatically increase their gold consumption, you’re looking at a major tailwind for yellow metal prices.

That’s something to think about if you’re considering adding gold or gold miners to your portfolio.

 

That’s it for today.

Cheers,

Doug Fogel

Contributing Editor, Dear Retail

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