Poor monsoon no problem, Indian gold demand set to rally in months ahead

On the surface of it, gold bulls would have good reason to fear months more of depressed demand from India, the world's top consumer: not only are prices still near record highs, but vital monsoon rains are in a deep deficit.
But a close analysis of import patterns over the past decade shows that rainfall is a poor predictor of gold demand in the latter half of the year, when harvest revenues and a series of festivities typically cause a spike in buying.
Looking more closely at the better-aligned indicators suggests in fact that imports should rally: the change in gold prices, which for the moment are higher than a year ago, but stable in the past few months; and rural GDP, projected higher but which could be supported by strong prices and government support plans in case poor rains damage the harvest badly.
While India's economy still remains heavily dependent on a farm sector that, in turn, relies on the monsoon for 60% of its irrigation, the old link that suggested heavy rains would translate into a gold buying frenzy has evaporated, say analysts.
"We are not in the 1980s and 70s and 60s when rain played a very important role in our GDP through the agri sector growth," said Amitabh Chakraborty, president (equity) at Religare Capital Markets in Mumbai. "Now agri GDP is more related to rural wealth and that is actually underpinned by many rural schemes."
The case for a recovery in demand -- after a 54% slump in imports in the first half of the year -- was also bolstered by a survey of leading retailers at the India International Jewellery Show this week in Mumbai.
Based on a simple regression using available data, including GFMS imports for the second half of every year since 2000 and price changes, imports in the second half may rise about 15%, according to an analyst who performed the analysis on behalf of Reuters but declined to be named because of company policy.
"The estimate of the percentage increase in gold imports is about 15% provided the gold price increase of 19% stays steady," the analyst said. He cautioned though that: "considering the paucity of data, the prediction bands are very wide."
A 15% rise would boost July to December imports to 457 tonnes. In July-December of last year, despite average rainfall, imports rose 46.5% year on year.
FARM INCOMES BOOSTED
Examining data for the second half of the year from 2000 through 2008, gold imports have the highest correlation with percentage change in prices at 0.66.
But the correlation with rainfall is just -0.1, suggesting no consistent relationship between the two.
A correlation of 1 indicates a perfect relationship, and a -1 indicates the two data points move in opposite directions.
"Though a monsoon is needed to spur agricultural incomes, it is not the only driving factor," said T. Gnanasekar, director at Commtrendz Research.
That figure should help assuage concerns of a further deterioration in imports if India's June to September rains continue to fall short of norms.
So far this season rainfall is about 28% below the norm, well below the government's forecast for a milder 4% shortfall at the start of the monsoon. So far 161 districts have been declared drought prone, stoking anxiety about the impact on economic growth.
The figures also suggest that while crops may shrivel, government measures often cushion the blow for farmers with measures such as easier credit, loan waivers, employment generation plans and state-set 'minimum support prices' -- all of which help generate money for buying gold.
In this year's budget, the government set aside an agriculture credit meant for cheap loans to farmers of 3.25 trillion rupees ($68 billion), up 13% on year.
Also, nil taxation and migration to cities, additional earnings by farm populations and selling of land with increasing urbanization put capital into farm productivity, the analysts added.
"A lot of tertiary jobs have been created. Go to any mall, there are 200 people either mopping the floor or housekeeping... Earlier there were no avenues for the village people to earn other than agriculture," Chakraborty added.
India's political ideology traditionally favours the farm community, which employs around 70% of its 1.1 billion population, although its share in national GDP has been declining.
Ultimately, it may be price stability more than anything else that will dictate the pace of buying over the next few months, with global bullion having steadied at around $950 an ounce, a relatively modest rise from an average $833 in the second half of last year, when prices backtracked over six years of gains.
In the busy season when the biggest of the festivals fall, a sharp dip often catches the trade unawares and stocks are known to run out and quick imports are made at big premiums.
Even a rally in prices may actually turn out to draw more people to buy fearing further rises: data show that when prices jumped sharply year on year -- in 2002, 2004, 2006 and 2008 -- the busy season imports also jumped on year, possibly because people rush to buy on the dips.
"I think there will be good buying when the market comes off," said Afshin Nabavi, head of trading at MKS Finance, Geneva.