LONDON/MUMBAI • To gain insight into the weakening gold market, talk to an Indian farmer.
In a country where an estimated 800 million people depend on agriculture and many revere gold as an ornament and store of wealth, growers flush with cash during harvest season have helped India vie with China as the world's largest buyer of bullion.
Sales usually surge this month in the main festival season of Diwali (or Deepavali), with farmers buying gold as religious offerings and elaborate wedding adornments that serve as a bride's dowry.
Less so this year, however. El Nino weather patterns have led to the driest monsoon season in six years, reducing farm output and incomes.
Farmers like Mr Ranjeet Chavan are cutting back. "I was hoping to buy gold earrings for my daughter, but I have given up hope," said Mr Chavan, 35, who grows sugar cane about 240km from Mumbai.
HOPES WASHED AWAY
I was hoping to buy gold earrings for my daughter, but I have given up hope. The rains weren't great... How can we even think of gold?
MR RANJEET CHAVAN, a sugar cane farmer, on how the poor harvest has forced him to cut back on spending
"The rains weren't great and my crop didn't fare so well. How can we even think of gold?"
He's not alone. Demand is so weak among the rural Indians making up almost 60 per cent of domestic gold consumption that dealers who stocked up before Diwali are offering some of the biggest discounts in decades.
That can only worsen the environment for international prices already headed for the 21st century's longest run of annual declines.
Gold imports to the western state of Gujarat, where farmers grow cotton and wheat, last month fell 87 per cent from a year earlier, according to a report in the Times of India newspaper.
"Demand in India is very, very poor," Mr Afshin Nabavi, head of trading and physical sales at MKS (Switzerland) SA who works with India's biggest refiner, said by phone from Geneva.
"The monsoon is so important in Indian gold demand, below-average rain will definitely have had an impact," he added.
Dealers are offering the largest discounts to London prices that Mr Nabavi has seen in the run-up to the festival buying season since at least 1998.
The problems began with India's failure to anticipate this year's full effect of El Nino, which led to unusual weather and threats to crops worldwide from Ecuador to Indonesia.
Rains, initially forecast to be 7 per cent lower than the 50-year average, have come in 14 per cent below. The monsoon is the main source of irrigation for India's 263 million farmers.
Demand for gold in India fell about 20 per cent year on year during the past two El Nino events of at least moderate strength in 2002 and 2009, according to World Gold Council and GFMS Thomson Reuters data compiled by Bloomberg .
Following the weakness in 2009, a good monsoon conversely contributed to a bounce-back in demand the following year, when purchases increased 74 per cent year on year, according to precious metals analyst Suki Cooper at Standard Chartered.
This year, kilogram bars of gold were being sold to wholesalers by dealers at a discount to the London spot market after tax of US$4 (S$5.70) to US$11 in the lead-up to Diwali, according to a survey of six traders and analysts. That is unusual in a period where strong demand usually results in a premium, they said.
"They got carried away and imported too much," Mr Nabavi said.
Gold for immediate delivery traded at US$1,092.35 an ounce in London on Monday, according to Bloomberg generic pricing. A kilogram of gold at that rate would cost US$35,119.87.