Investors in India are holding onto their used gold jewelry and coins, anticipating further price increases despite recent record highs.
This has led to a scarcity of these items in the market, as many are reluctant to sell, expecting bullion prices to continue their upward trend.
In stark contrast to March, when spot gold prices exceeded $3,000 an ounce, prompting a wave of retail selling and a subsequent increase in scrap supply, the current situation differs significantly, Reuters said in a report.
Investment value
“Indians now believe gold prices will rise even higher, which is why they’re choosing to hold their assets instead of selling them for a profit,” James Jose, managing director of refiner CGR Metalloys told the news agency on the sidelines of the India Gold Conference in New Delhi.
Local gold prices have been on a remarkable upward trajectory, recently reaching an unprecedented peak of 110,666 rupees ($1,260.94) per 10 grams earlier this week.
This new record highlights a significant surge in the value of gold within the local market.
The metal’s performance year-to-date has been particularly impressive, with prices escalating by a substantial 42%.
This sharp increase builds upon a strong foundation established last year, when gold prices had already seen a considerable gain of 21%.
The consistent appreciation over the past two years underscores a growing demand for gold and potentially reflects broader economic trends or investor sentiment in the region.
This sustained growth in value makes gold an increasingly attractive asset for investors seeking stability and returns.
Shortage in scrap supplies
According to Harshad Ajmera, a wholesaler at JJ Gold House in Kolkata, scrap supplies tend to increase when prices experience a rapid and significant rise, as observed in recent months.
He was quoted in the report:
Consumers now think prices could even touch 125,000 rupees, so they’re holding on to their gold instead of selling.
As new jewellery has become unaffordable for many consumers due to rising prices, they are increasingly trading in old pieces for new ones, according to Amit Modak, CEO of Pune-based jeweler PN Gadgil and Sons.
With a sharp decline in dore imports (a semi-pure alloy from miners), refiners are now relying on scrap from replaced jewelry to maintain their operations, according to Ajmera.
The looming festive season, a period traditionally marked by heightened gold demand, is creating a unique dynamic in the Indian bullion market.
A significant constraint on this demand is the limited availability of domestic gold scrap, which typically serves as a crucial source for jewellers to replenish their inventories.
This scarcity of scrap has a direct and beneficial impact on banks.
Boon for banks
As a direct consequence of the scrap shortage, jewellers are increasingly compelled to turn to formal channels, primarily banks, to procure gold.
This shift is driven by the necessity of meeting the sustained and often elevated consumer demand for gold jewellery and articles during festivals.
By relying on imported gold supplied through banks, jewellers can ensure a steady supply, albeit at potentially higher costs compared to recycled domestic scrap.
This reliance on imported gold boosts the revenue streams for banks involved in bullion trading.
In October, Indians will celebrate the auspicious festivals of Dussehra and Diwali, occasions traditionally associated with buying gold.
Ordinarily, rising prices lead to significant discounts as more scrap enters the market.
However, due to limited supply, banks can demand a $1 premium, even at record price levels, according to a Mumbai-based jeweller who works with a bullion-importing bank.
Gold imports into India rose to $5.4 billion in August, a 37% increase from the previous month, according to trade ministry data.
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