Rural Buying May Boost India Gold Demand

MUMBAI -- Gold investments in India are likely to pick up from November as the harvest of an expected bumper summer-season crop puts more money in the hands of farmers, who traditionally stash away their savings in precious metals.



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A gold neck piece kept on display at a showroom in Mumbai, August 20, 2010.

.Increased rural demand would partly offset a slowdown in purchases by urban consumers, who have been put off gold--despite the start of the festival season this month--because of a recent surge in prices.



Local prices hit a fresh all-time high of 19,300 rupees ($428) per 10 grams Thursday in the main Mumbai Market, according to the Bombay Bullion Association. Rural buyers usually account for 30%-40% of gold purchases every year.



\"The balance will shift this year because of good monsoon rains. The effect of that will actually be felt closer to Diwali, when they will all buy for auspicious reasons,\" T Gnanasekhar, director of Commtrendz Research, said.



India\'s majority Hindu population considers it auspicious to buy gold during Diwali, the Hindu festival of lights, which this year will be celebrated on Nov. 5.



\"Most of the crops would have been harvested by then and they (farmers) would be buying. Typically, their reserve money goes into gold,\" Mr. Gnanasekhar said.



He added that rural demand may account for around half of the total 400-450 tons of gold purchases this year. India is the world\'s largest gold consumer.



India\'s farm ministry has estimated that the summer-sown foodgrains output will rise 10.4% to 114.63 million tons, while production of the main seasonal crop, rice, will be around 80.41 million tons.



India was hit by one of its worst-ever droughts last year, which crippled summer crops and, consequently, rural demand for gold. In 2009, gold purchases totaled around 343 tons.



\"If prices pull back $50-$70 an ounce (around Diwali), you will see exemplary demand,\" said Krishna Kumar Nathani, managing director of Indiabullion.com.



Overseas spot gold prices hit a new high of $1,300/oz Friday, driven by dollar weakness and safe haven buying. Gold prices have rallied 10% in the past two months alone and are up 18.6% on the start of the year. Analysts predict further rallies to $1,500/oz in the medium term.



Traders and analysts also said the stock market\'s rally is unlikely to impinge on gold demand.



India\'s benchmark Sensex closed Tuesday, Sept. 21, above the 20,000 level for the first time since January 2008. The 30-share benchmark has gained about 11% so far in September and it is up 20% since June 9, helped by strong foreign inflows, good April-June quarter corporate earnings and stable global equity markets.



\"Gold and equity markets are expected to move in tandem in the coming days. This time of the year, all asset classes are expected to do well because of the general mood of prosperity,\" said Anand James, chief analyst with brokerage Geojit Comtrade.



India\'s festival season runs from September to late November, or even early December in some states, and is the busiest gold-buying period.



Indian consumers traditionally preferred to buy gold jewelry, but rising prices of the yellow metal have started spurring investment demand for coins, bars and, most recently, gold exchange-traded funds.



Mr. James said investment demand in India has also been boosted by the launch of lower denomination investment products such as the National Spot Exchange Ltd.\'s electronic 1 gram gold contracts.



\"Such measures have gathered the attention of small retail investors who were largely dormant in the investment field,\" he said.


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