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Gold Demand: View: Changing demographics have led to lower gold purchases



By David Fickling

The world's most important gold market is not what it used to be.

Just ten years ago, India's hunger for gold jewelery and bullion meant that it accounted for about a quarter of global demand. Consumption has since fallen by around 24 per cent. Ahead of Sunday's Diwali festival, when purchases traditionally peaked, September imports dropped to their lowest level in three years.

Part of this is a reaction to short-term price factors. Buyers tend to stay away when the bullion price in Mumbai rises above about 30,000 rupees ($ 422.97) for 10 grams. Thanks to the decline of the rupee and the metal that has broken through the long-standing ceiling of $ 1

,350 per throne, it has been in this territory now for the best part of two years, and is currently trading at 38,200 rupees.

However, there are long-term problems to worry about. About two-thirds of the country's gold is bought in rural areas, where its traditional roles such as investment and decoration are intertwined. Rural Indians are far more likely to buy gold jewelry than their urban counterparts, and tend to favor ordinary pieces that can easily be appreciated and traded if money is tight.

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<p>  It makes demographic changes a risk for the entire market. Rural population growth is stopping as people migrate to cities and birth rates fall, and shifting focus on consumer spending. "Millennials in urban India are increasingly tempted by non-gold items, especially luxury fashion and smartphones," according to a report by the World Gold Council, an industry group.
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<p>  There are also an increasing number of alternatives to gold jewelry for those who want to save up for a rainy day. (In the case of rural India, the better term might be "a dry day," as weak monsoons tend to tighten farmers' cash flows and force them to farm or sell.) Gold was originally popular as a store of value because the banks were It is not available, but the proportion of adults in rural areas with an account has risen to 79 percent in 2017 from 33 percent in 2011, according to the World Bank. A larger proportion of the adult population now has a bank account than in Hungary or Turkey.
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<p>  Given the State Bank of India's today's 6.4 percent benchmark one-year deposit rate and inflation of 3.99 percent, a savings account is a long better way to protect wealth from rising prices than a bang.
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<p>  Even in deprived urban areas, alternative stores and capital sources are opened. Around four million people in the states of Delhi will get ownership rights, the government said this week, a move that would help them take out loans to build houses.
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To be sure, the lure of gold cannot be wiped out by banks. Another reason why purchases tend to be so tight at the end of October is that it is peak wedding season. About half of India's demand for gold jewelery is for the heavy pieces worn as part of a wedding dress, according to the World Gold Council. Consumer spending, the other major part of gold demand along with investment (industrial use is a distant third), will tend to increase with revenue, taking advantage of the same urbanization that is depressing in rural areas.

However, consumers are a tough market to target this year. Purchase of cars, usually a good power of attorney for the audience's appetite for items with big tickets, collapses. Sales of cars, trucks and buses fell by more than one-third in September from the previous year, and two-wheelers were down 22.1 percent.

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<p>  The same pattern is highlighted in broader data. The proportion of consumers who believe their current financial situation has deteriorated and will worsen over the coming year was the highest since September 2013, according to the Reserve Bank of India.The views on the labor market are the worst in seven years of records, and for the first time in four years of data, consumers believe they spend less on discretionary purchases.
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<p>  India's size in the world market will not disappear overnight. Consumers still account for more than one in six ounces purchased globally.
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<p>  Still, this change in gold demand should be a warning to investors. For many years, its role as a rural investment made India a downside buffer for the yellow metal, with farmers rushing in to make physical purchases every time the price dropped to levels that tempted investors to liquidate their positions.
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<p>  As the country changes, that dynamic disappears. Although high gold prices still seem to be making purchases, consumer-focused urban jewelry buyers may not be around to support the market when it is weak.
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<p>  Gold's attraction for investors has long been its countercyclical tendencies. As this important part of the market becomes more pro-cyclical, they will do well to pay attention.<br />
<br /><em><br /><strong>  (This column does not necessarily reflect the views of economictimes.com, Bloomberg LP and its owners) </strong></em><br />
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