Although many people now know Germany is the second largest investor in gold, (After the United States) it is very far from the largest consumer of gold. The largest consumer was China at about 985 tons of gold, followed by India at 855 tons in 2017. After India, the consumption of gold by any nation falls off dramatically. India’s consumption is more than four times greater than the third-place country, the United States of America. India’s relationship to the world gold market is essentially opposite to that of Australia, for example, which is the world’s second largest producer of gold while in consumes comparatively little.
Unlike the world’s largest consumers, China and the United States, which are also the first and third largest producers, respectively, India produces very little of its own gold. This forces them to import almost all of the gold the country uses. This reliance on external supply makes India’s consumption of gold directly dependent on the country’s financial condition. The changes in India’s demand and lack of supply therefore create an even greater effect on world gold prices than might be expected from the second largest consumer.
Due in large part to jewelers replenishing inventory in response to a rebound in retail sales, India’s gold imports increased a dramatic 67% in 2017, according to provisional data from precious metal consultancy GFMS. These significantly increased purchases by India, which accounts for a huge portion of gold imports as it provides very little itself, could support continued higher global prices. Due in large part to India’s demand, spot gold values gained more than 13 percent last year, their best annual performance since 2010.
Part of 2017’s increased retail demand was due to a recovery from a cash crunch in the last quarter of 2016 caused by the Indian government’s demonetization. By eliminating the 500 and 1,000-rupee notes, 86% of the value of cash in circulation was removed from the marketplace. This reduction greatly dampened gold purchases in the latter part of 2016. The demonetization was an attempt to combat tax evasion, corruption and financing of militant groups. As the cash crunch eased in 2017, combined with improved farmers income due to good monsoon rains in 2017, retail demand in rural areas increased. Two-thirds of India’s retail gold demand comes from rural areas, which were most directly affected by the good rainy season. The rural purchases are mostly for jewelry, which makes the jewelers sales particularly sensitive to the agricultural sector’s economic condition.
Since India is overwhelmingly dependent on imports for its gold supply, there was little supply available to replace current stocks once the local demand improved. In response to their greater sales and this lack of local reserves, India had to significantly increase gold imports in 2017, which contributed greatly to the world’s substantial gold price increase.
In December 2017, global gold prices fell to their lowest level in five months in anticipation of a hike in interest rates from the U.S. Federal Reserve. The Fed did, in fact, increase the prime rate 25 basis points to 4.5% on December 14, 2017. One might say commodity speculators actually guessed right, for a change.
The lower world gold price, combined with the need to satisfy greater local demand, encouraged Indian banks to increase imports that month. Considering India’s lack of domestic production, its level of imports is particularly sensitive to domestic demand. The increased gold imports in December, 2007 were up 40% over the previous year, according to the GFMS.