Elections, Record Prices To Stall India's Gold Demand

The upcoming Lok Sabha elections and the recent surge in gold prices will stall demand for the yellow metal in India, according to the World Gold Council. The elections will be held in seven phases starting April 19 and conclude in the first week of June.

Data shows that gold consumption has fallen during three of the last four general election periods, with a decline in demand for both jewellery and bar and coin, the WGC said in a report on Tuesday. "India's election is likely to be somewhat of a damp squib for gold demand."

Heightened scrutiny on the movement of cash, gold, and jewellery during the election season impacts gold demand. These items are commonly used by political factions to entice voters, even as authorities step up detection efforts to stop such malpractices.

Moreover, pent-up demand cannot be expected in June as the wedding season nears its end, the Council said. Jewellery drives 70% of Indian consumer gold demand.

Given the uncertainty surrounding the elections, gold is likely to attract safe-haven demand, potentially adding upside pressure on prices, said Sugandha Sachdeva, market expert and founder of SS WealthStreet.

Adding to the demand worries are domestic gold prices that have risen to all-time highs, presenting a major headwind.

Gold futures for June delivery hit an all-time high of Rs 71,739 per 10 grams on Tuesday on the Multi-Commodity Exchange Ltd. Spot prices have jumped 13% since the start of 2024, in line with the global rally.

"Buyers may delay purchases in anticipation of more favourable pricing," Sachdeva said, adding consumers eventually adjust to new price levels as demand tends to be resilient over the long term.

The summer festival of 'Akshaya Tritiya'—considered an auspicious day for buying gold—can also help demand if prices experience a correction, she said.

Higher prices could encourage investment into bullion-linked financial products like gold exchange-traded funds, the WGC said.

However, flows into gold ETFs in India declined 25% in March, WGC data showed. Assets under management stood at $3.6 billion, while total holdings was at 44.7 tonne, down 0.7%.

This is in line with the trend seen globally, as gold ETFs lost $823 million in March, extending their losing streak to 10 months, though outflows narrowed. This deceleration indicates sustained interest in the precious metal, Sachdeva said.

Central bank purchases have remained elevated despite the bullion rally. The Reserve Bank of India's net gold buying in the first two months of 2024 (13.4 tonne) already amounts to more than 80% of its 2023 annual net purchase of 16.2 tonne, and represents the largest purchase for the period since 2015. The RBI is among several central banks that have been accumulating gold at a steady clip, the WCG said.