India's Gold Market Remains Robust as Unofficial Sources Ensure Ample Supply

India's gold demand remained robust in 2013 despite its efforts to reduce gold imports to control the huge current account deficit, as the country received a vast amount of supply from unofficial channels.

India's total gold demand remained strong at 974.8 tonnes in 2013, the third highest annual volume, according to the World Gold Council's latest demand trends report.

Gold supply to India's domestic market was constrained due to higher import duties, strict import quotas and restrictions on gold-related lending and coin sales, as the government tried to control its huge current account deficit.

India's gold imports declined 63% year-on-year between July and October due to the introduction of import controls, according official statistics.

"However, the Indian gold market is fed by a number of alternative sources, including recycled gold, domestic production and unofficial imports," the council said.

"As the underlying level of demand among Indian consumers remained robust, the sharp decline in the official import of gold into India led to an increasing amount of this demand being met by gold imported through unofficial channels."

According to market analysts, gold smuggling in India amounted to 20-30 tonnes per month, compared to the country's Finance Ministry's estimates of between 1-3 tonnes per month.

In its Gold Survey 2013 Update 2, Thomson Reuters GFMS estimates annual illegal flows of gold in excess of 150 tonnes in India. The World Gold Council expects the amount of unofficial flows to be considerably higher, reaching closer to 200 tonnes.

Global Demand

Global demand for gold was at 3,756.1 tonnes in 2013, down 15% from 4,415.8 in 2012, primarily due to a slump in gold investments and a decline in central bank net purchases.

Meanwhile, global consumer demand for gold, representing jewellery, bars and coins, increased by 21% to a historic high of 3,863.5 tonnes.

Demand for jewellery rose to the highest level in 16 years in 2013 as consumers especially in China and India took advantage of the lower gold prices. Gold prices plunged 28% in 2013, its biggest decline in 32 years, as money managers in the US and Europe dumped gold and bought other assets, such as shares, which were expected to yield more returns in line with the economic recovery in the regions.

"Much of the growth was concentrated in the first half of the year, unsurprisingly given the sharp declines in the price in April and June, which prompted a swift and strong reaction from consumers in the more price-sensitive markets such as India and China," the council said in its latest report.

"The second half of the year saw this trend continue as the impact of lower prices was felt more globally, particularly in the jewellery sector."

Total demand for gold in China set a new record of 1,065.8 tonnes in 2013. The increased yearly demand was primarily due to the price declines in the second quarter and the Chinese New Year in the fourth quarter, a traditional occasion for gift-giving.

Demand from the technology sector declined 1% to 404.8 tonnes, while outflows from exchange traded funds and similar products represented 880.8 tonnes of gold.