Above Average Monsoon and Gold Imports

More than average monsoon this year will bring a bounty to India's rural population and a much needed boost to a struggling economy in form of more increment in GDP of Agriculture sector, but more cash in the hands of farmers brings an unwelcome consequence for the government - more demand for gold as about 60 percent of Indian gold demand comes from rural areas.  Increased demand from the world's biggest gold buyer will buoy global prices for the metal.  In 2010, the last year that rains were heavily above average, gold demand soared 37 percent in the fourth quarter after harvests.

Gold is one of the biggest items in a record current account deficit that has helped push the rupee to an all-time low, and as New Delhi scrambles to stop the decline it has taken measures to curb gold imports and consumption.

The central bank has also moved to curb supplies by insisting 20 percent of all imports be made into jewellery for export. Customs authorities have yet to issue clarifications on how the rule will work and as a result, imports have totally dried up since the central bank announced the rule on July 22.  Imports ground to a halt in late July due to uncertainty over new regulations aimed at reducing the flow, but were likely to pick up again once authorities have clarified how the rules will work. A prolonged stoppage could cause smuggling to rocket as India is dependent on imports for most of its gold.

Gold's lustre has been further burnished by the country's current economic woes, with Indians hoping to hedge against the falling rupee and consumer price inflation of nearly 10 percent. Domestic gold prices hit a record high of 35,074 rupees per 10 grams on August 28 largely as the rupee slid against the dollar.  But international dollar prices for bullion are currently quite a bit below an all-time peak, leaving plenty of room for investors to bet on realizing gains longer-term.

The wedding season, when parents shower gold on their daughters as dowries, will coincide with the harvest, along with a host of festivals like Deepawali etc. where buying gold is considered auspicious.  And the finance ministry concedes gold demand and imports will rise in the lead-up to the wedding season, which peaks in early November this year as there are cultural factors, we can't do much about them.

India's passion for gold pushed imports to an all-time high of 162 tonnes in May and duty is now at a record 10 percent as the government tries to stop the damaging outflow of dollars for bullion.  Gold is India's most expensive non-essential import.  Some of that demand will be covered by recycling if imports are tight, though some is already being met by smuggling. There is nothing available through official channels, (so) supply is happening through unofficial channels.  Whatever the source, demand is likely to outstrip supply and that means domestic prices could rise.  But the consumers (farmers etc.) may not be deterred by price hikes as they take a longer view of their investment as gold's value always rises as per their belief.  It seems that more than average monsoon may wash away quite a bit of gold imports.