Festival season fires up gold sales every year. Not this time.

The annual festival season that typically sees a scramble for gold may see a fall in demand this time, the first in four years, as runaway prices put the yellow metal out of reach for many Indians.

Gold price nearing ₹80,000 per 10 gm has curbed new purchases and turned customers to exchanging old ornaments in the December quarter, jewellers said, a time when festivals and weddings spark gold purchases.

“There has been a spurt in prices and volumes could decline by 10-12% (during the festival season), though in value terms, there will be marginal growth,” said Suvankar Sen, managing director and chief executive officer of Senco Gold, which runs 165 stores.

Spot price of 24 carat gold (99.5% purity) has surged almost 30% in the past one year to a record ₹79,479 per 10 gm (including 3% GST), according to data from commodity exchange MCX. The price is up 6% in the past one month alone, coinciding with buying during the festival season, which runs from 3 October to 29 October this year.

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Sen said the prices have been driven by uncertainty ahead of the US elections early next month, fears of an Israel-Iran war and a cut in a key US policy rate last month. A Trump victory could lead to a weaker dollar, lifting gold prices further.

The Senco Gold stock has jumped 9.5% to ₹1,378.7 in the month through Friday, coinciding with the jump in gold prices. Surendra Mehta, national secretary of nodal trade body India Bullion and Jewellers Association (IBJA), said a 10-12% volume dip during the festive season was “extremely rare”, seen only during the covid-hit quarter of 2020.

Consumption dip

During the festival quarter in 2020, India's jewellery consumption fell 8% to 137.3 tonnes, according to World Gold Council (WGC) data. The fourth quarter is when the festive season of Dhanteras falls every calendar year, a period that tends to account for as much as 30% of the annual demand. Apart from this the quarter sees marriage demand, too.

In the first half of the current calendar, Indians consumed 202 tonnes of jewellery, down 8% from H1 of 2023 because of high prices, according to WGC, which has yet to release the September quarter data.

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Interestingly, 2024 has seen gold being lapped up by central banks, including RBI, which added 45 tonnes in the calendar year through August, making it the highest net purchasing banker in the period after Turkey's central bank, according to IMF data cited by WGC. India's official gold reserves stand at around 848 tonnes.

The buying by central banks is one of the catalysts for the near-30% price rise over the past year. WGC data shows central bank demand to have increased 5.1% year-on-year in the H1 of 2024. Over the same period, world jewellery consumption declined 15% to 869.7 tonnes.

Old jewellery exchange

The rise in gold is also driving consumers to exchange old gold jewellery for new ornaments.

“From an average of 20%, we see the exchange of old gold for new ornaments having risen to around 35% in our stores after the steep price increase,” said Saurabh Gadgil, chairperson and managing director of PN Gadgil Jewellers.

While Gadgil accepts the probability of an industry-wide decline in volumes, he estimates his 48 stores to clock flat volumes this festive season versus a year ago as “apprehensions of a further price rise could drive consumer buying ahead of a spate of weddings”.

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The appetite for jewellery companies on Dalaal Street was witnessed at the listing of PN Gadgil Jewellers. Against an issue price of ₹480 a share, it listed at ₹834 on BSE, a 74% premium, on 17 September. The share closed at ₹747.55 on Friday.

The rise in gold price over the past month after the US policy rate cut of 50 basis points to 5% happened amid a 3% rise in the dollar index to 102.93 and a 9.7% jump in the yield of the US 10-year bond on concerns of financing the huge reported national level debt at $28 trillion or 99% of GDP.

Normally, when the US dollar rises, gold falls. But a rise in bond yields signals rising inflation, which is also a factor for the surge in the prices of the yellow metal, seen as an inflationary hedge.