The robust demand for gold and silver during Dhanteras and Diwali in India is putting new pressure on the national economy and prompting the government to re-focus on its gold monetization scheme.
Expectations are rising among some economists that India's imports of gold and silver have pushed the country's trade deficit to a record high of over $30 billion set in July. Last month, the trade deficit was $22.47 billion, according to government reports.
The gloomy expectations are related to the fact that last week, during the five days of celebration in the country, there was a record demand for gold and silver bars. According to unofficial reports, in some precious metal shops, sales during Diwali rose by 15–20% as consumers took advantage of lower gold prices.
Commodity analysts at Heraeus noted that India's festival and wedding season meant that the country saw its highest demand for gold in the fourth quarter. They stated that this year, after a strong rainy season, an increase in income has been added to the steady demand; however, the European precious metals firm announced that despite strong sales, demand is unlikely to exceed last year's record.
According to the World Gold Council, in the fourth quarter of 2021, quarterly demand for gold in India soared to a record 344 tons due to purchases driven by the holiday season and pent-up demand from the previous year when events were postponed due to the lockdown. This was 44% higher than the average level of demand in the fourth quarter. "Despite a wave of infections earlier this year, demand has not been as badly impacted, meaning the boost will be less pronounced this year. Annual demand in India could therefore be slightly lower year-on-year," analysts said.
At a time when demand for gold is expected to remain below last year's records, silver has a very different story. India's silver imports are expected to exceed 10,000 tons this year, hitting a record high and more than doubling the average annual import.
Some economists say that the question the government is now facing is how to convince consumers to deposit gold with the government to participate in the monetization scheme.
According to the government's plan, citizens can store their gold in banks and receive interest on their gold for a certain period of time. At the end of the term, consumers can receive the equivalent amount they earned in gold or cash. Gold is melted down and returned to the economy. The plan is to increase the country's domestic supply of gold by reducing imports and, in turn, reducing the huge trade deficit.
The program was originally launched in 2015 and has had poor support for the last seven years. Only about 25 tons of gold passed through the program, compared to 25,000 tons that the WGC estimates are stored in private homes, religious organizations and temples.
According to some analysts, one of the main reasons consumers don't want to use this scheme is because their gold has sentimental value and is a family heirloom they don't want to destroy.
During Diwali, gold jewelry is often bought as a gift because it symbolizes wealth and prosperity.
