Drought impact: Gold buying may slump in rural markets

DIP IN AGRI PRODUCTION MAY KEEP BUYERS FROM JEWELLERY SHOP GOLD demand in India, the biggest market for the yellow metal, may fall by around 20% in the rural markets due to drought situation, according to industry estimates. Already, gold imports have been lower by 56% in 2009, and experts say, dip in agriculture production may keep rural buyers away from jewellery shops during the upcoming festival season.      India's gold imports slumped by 65% to 7.8 tonne in July when compared with the same period last year. For the period from January to July, India imported about 71.6 tonne, which is 56% lower than the same period last year.      According to Anagram Capital research analyst Renisha Chainani, while demand in India is falling, that in China is increasing and may compensate for lower buys in India. Gold prices will remain higher and will keep rural consumers, who account for 60-70% of total gold consumption in the country, away from the jewellery market, she said. Gold prices that were in the range of Rs 11,250-12,000 per 10 gm in August 2008 rose to more than Rs 15,000 per 10 gm in August 2009.      "The huge decrease in gold imports can be attributed mainly to higher prices.      Typically, rural gold sales fall whenever there is a fear of insufficient rains as it leads to a squeeze on farm incomes. When people do not have money enough for buying essentials, why would they buy gold," Ms Chainani told ET.      She added that prices of gold will not come down as global markets continue to be bullish for the precious metal. "Even European Central Bank (ECB) could sell only 140 tonne of gold this year against 350 tonne till September, 2008," she said.      Diwali season usually spurs huge gold buying from rural buyers as crop season ends in September-October. However, this year, the trend will not be sustained and might reverse. "Drought will decrease purchasing power of consumers. On the other hand, prices of essential commodities typically go up during a drought-hit year. It was seen earlier that rural people sell gold to fight drought. We believe that this year, farmers will sell gold in significant volumes," said Gujarat Jewellers' Association secretary Shantibhai Patel. He added that higher gold prices have hit the demand but will give relief to people who will be forced to sell gold.      However, World Gold Council (WGC) believes that there will not be any significant impact of drought on the gold demand. "There is a revival in the demand. Richness of rural areas has been increased significantly in recent years. Moreover, these areas are now not dependent only on agriculture. The situation is different in each state. We believe that the demand for gold will remain unchanged from last year," said WGC (India) director Dharmesh Sodah.