Gold demand strong for another seven weeks - or not?

A combination of low prices, weddings, Eid and Diwali are likely to give the physical market substantial support throughout much of September - the question is whether purchasers are buying more, or earlier, or both?

LONDON - 

The physical gold market has been immensely strong since the middle of August, with India in the vanguard.  There has been regular evidence of Indian jewellers having to pay high premia for physical metal and more than one investment bank has been reporting that gold sales to India have rocketed due to  the substantial restocking that has taken place in the local market over the past year.  Now the numbers are starting to filter through. 

The latest (provisional) figures from the Bombay Bullion Association show imports of approximately 100 tonnes of gold during August, a rise of 45% over August 2007 - although the year-on-year comparison is probably less important than the fact that this increase is a very substantial jump over the first half of the year, when imports were very considerably lower as jewellers drew down on inventory.  India typically imports upwards of 700 tonnes of gold in any one year and until the August surge it looked as if imports this year would be down by at least 200 tonnes.

This may yet prove to be the case, but for the next few weeks demand is likely to remain extremely strong and, with physical demand rebounding also in the Far East, as well as the rampant demand for gold Eagles in the US, the refineries are likely to be flat out for some time to come.  Heraeus GmbH for example, one of the larger refineries in Europe, has been reporting a two-week waiting list while a large order for Krugerrands emptied the Rand Refinery's vaults last week and the refinery expected to take up to a week to replenish inventory.

Dubai is also reporting strong gold trade, with consumers taking advantage of the fall in prices to start their buying for Eid and Ramadan earlier than they would normally do.  The key question for the medium term, therefore, is whether these buyers will continue to buy gold right the way through to the Festivals themselves, or whether their appetites will be sated earlier in the year than usual.

Eid-al-Fitr is the Muslim festival that concludes the holy month of Ramadan, an auspicious period for wedding and is a major period for giving the gift of gold.  Ramadan started at the beginning of September this year and Eid-al-Fitr is scheduled for Tuesday 30^th September.  This varies slightly form country to country as it is a lunar Festival and depends on sighting of the moon.  The lunar nature of the Islamic calendar means that the date of Eid-al-Fitr in the Gregorian calendar moves by approximately eleven days each year and in 2009 it is scheduled for Sunday 20^th September.  The moon also needs actually to be sighted.  The Muslim holiday actually starts on the sunset of the day before Eid, so that celebrations will begin at sunset on 29^th September; furthermore the festival, because it is based on the sighting of the moon, will not start in North America until a day later.

Less well-known in the "western" world is the Eid al Adha festival, which occurs seventy days after Eid-al-Fitr and is also an important occasion for giving gold and which more or less coincides with the culmination of the Hajj pilgrimage.

Diwali, or the Festival of Lights, is the largest Hindu festival for the giving of gold and the first day of Diwali is widely regarded as the most auspicious day in the Hindu calendar for buying gold - although it must also be remembered that while Diwali is the most important festival in its own right, so local jewellers estimate that over 70% of gold jewellery purchases are wedding-related.  The Wedding Season is therefore even more important and this runs from late -September through to December.

This year Diwali falls on 28^th October and, especially as August includes the Shrad period which is an inauspicious period for gold-giving ceremonies, the fact that there has been such strong buying in August suggests that much of this activity is early stocking ahead of Diwali.

The amount of gold to be bought for Diwali and for weddings is obviously price-dependent, but the Monsoon season also needs to be taken into account as this has a direct impact on the quality of the harvest and with it, the amount of disposable income available to the farming community.  This is significant as some 70% of the Indian population is agrarian.  This year's monsoon season has been a good one, with rainfall marginally below average, which bodes well for jewellery demand this year.  Since the start of 2005 Indian jewellery and investment bar demand has averaged 26% of world-wide jewellery+bar demand, and 22% of global fabrication+bar demand (figures compiled for the World Gold council by research house GFMS Ltd). In the second quarter of this year, despite a 45% drop in jewellery and bar demand from 296 tonnes to 161 tonnes, India still accounted for 26% of world jewellery and bar demand and 22% of global fabrication.

The average Indian gold price in August 2007 was Rp 8,893 per ten grammes and in August this year it was Rp 11,562 per ten grammes, an increase of 33%.  The price is thus currently 15% off its recent highs and below the psychological level of Rp12,500 per ten grammes. This has helped to stimulate the recent surge in demand, but there will come a point at which the outright level of the price will affect tonnage as expenditure has to be finite.  . 

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