Rewind: Gold isn’t shining for farmers

Against a backdrop of inflationary pressures, unpredictable monsoon and dwindling govt expenditure, farmers turn to gold as a safeguard butthe recent surge in prices is adding to their woes

By Dr Kedar Vishnu, Dr Vaishnavi Sharma

Gold is prized for its intrinsic value, serving as a store of wealth, a hedge against inflation, and a universal symbol of luxury and beauty. India is a pivotal playerin the global gold market, commanding a significant portion of the world’s total demand for the precious metal. Additionally, with India boasting the world’s highest saving rates, at around 30%, it’s no surprise that Indians place their trust in the enduring value of gold, investing approximately 10% of their savings in it. Despite substantial demand for gold, India is not among the world’s leading gold-mining countries. Instead, it satisfies much of its demand through imports.

Demand Dynamics

In 2022, India stood as the fifth-largest importer of gold globally by value, with imports nearing $35 billion, constituting over 8% of the world’s gold imports, followed by Switzerland, China, the United Kingdom and Hong Kong. At the same time, India’s gold exports (comprising mainly jewellery) amounted to $124 million in that period, ranking it 93rd in the world in terms of gold-exporting nations.

While the initial quarter of 2023 (Jan-March) witnessed a notable increase in gold imports, rising from 126.3 tonnes to 136.6 tonnes compared with the same period in 2022, India encountered a 3% decline in its total gold demand for the entire year at 747.5 tonnes (774.1 tonnes in 2022). This downturn can be attributed to the volatility associated with gold prices in later quarters. The increase in gold prices resulted in a 6% decrease in the jewellery demand. However, investment demand, mainly in coins and bars, grew 7% to 185.2 tonnes, from 173.6 tonnes in 2022. This highlights how market changes affect gold demand, with import rises offset by price swings, influencing both jewellery and investment preferences.

• In 2022, China was the leading global gold producer, contributing around 10% to the worldwide production (375 tonnes), followed by the Russian Federation (324.7 tonnes) and Australia (313.9 tonnes) 

In terms of global gold mine production, there has been a consistent uptrend after the 2008 economic downturn. By 2010, worldwide gold mine production reached 2,560 tonnes, steadily climbing to over 3,000 tonnes annually since 2015. It saw another uptick in 2023, reaching 3,644 tonnes. However, this fell just short of the record set in 2018 at 3,656 tonnes. In 2022, China stood as the leading global producer, contributing approximately 10% to the world production (375 tonnes), followed by the Russian Federation (324.7 tonnes) and Australia (313.9 tonnes). India possesses a longstanding history of gold mining, but it’s been at a low level. In 2020, only 1.6 tonnes were produced, and there hasn’t been much change since then, according to the World Gold Council’s Gold Demand Trends Report 2023. Hence, India’s reliance on imports to meet its significant domestic demand.

Price Surges and Economy

Given India’s substantial consumption and investment in the precious metal, the surge in gold prices tends to have a notable impact on the Indian economy. In the past year, from April 2023 to date, gold prices have surged by more than 20%, experiencing significant volatility. The lowest recorded price occurred in October 2023 at Rs 56,158 per 10 grams. Over the span of just three months, from February to April 2024, gold prices skyrocketed by 18.5%. Several factors contributed to this unprecedented rise, including higher-than-expected US inflation in early 2024. To combat inflation, the Federal Reserve tightened monetary policy, reducing the dollar supply and increasing interest rates, causing the dollar to appreciate against the rupee.

Anticipating an interest rate cut by the Fed in April, many investors ended up buying more gold. The higher level of uncertainty about the interest rates worsened the situation by increasing the demand and value for the dollar again. Typically, gold prices are expected to be lower when interest rates are higher. Investors prefer to buy bonds or invest in banks for higher returns than gold. However, due to massive uncertainty in the interest rates, investors from the US, and eventually worldwide, bought more gold, further aggravating the issue.

In the Indian context, the depreciation of the rupee against the dollar further increased the gold price in the domestic markets. Since most of the gold is imported, the decline in the rupee value adversely impacted the price of gold. The exchange rate essentially determines the fluctuation of gold prices in India. Gold prices increase when the value of the dollar increases and the rupee depreciates. In the last two years, policymakers have expressed concerns regarding the consistent decline in the value of the rupee against the dollar, especially since January 2022. The rupee hit a historic low of 83.52 against the dollar on April 19, 2024, declining in value by almost 12% in the last two years.

According to Chris Wood, Global Head of Equity Strategy at Jefferies, who attempted to explain the recent spike in gold prices in his ‘Greed and Fear’ report, the Chinese Central Bank has been purchasing more gold and trying to decrease the available dollar reserves. This strategy aligns with China’s intention to devalue or diminish the significance of the dollar as a global reserve currency, thereby bolstering demand for gold. Additionally, escalating geopolitical tensions in West Asia and the conflict between Russia and Ukraine have further fuelled uncertainty, prompting investors to seek the safe haven of gold. This is because, historically, during wars or geopolitical uncertainty, people tend to buy more gold due to its perceived stability and value, driving up demand and prices.

The onset of the wedding season has also significantly heightened the demand for gold in India. India’s relatively swift economic recovery from the pandemic, in contrast to many other nations, has further bolstered this demand. Consequently, compared to global economic conditions, the demand for gold remains notably elevated within the Indian market.

Impact on Farmers 

Small and marginal farmers with an average landholding of less than two hectares dominate Indian agriculture. Recent findings from the National Sample Survey Organization (NSSO) underline this reality, revealing that approximately 82%of India’s farming community belongs to this category. Despite strides in facilitating access to formal financial channels such as banks and microfinance institutions, many farmers still find it difficult to secure loans for these institutions, mainly because of limited financial literacy, compounded by low levels of education.

Farmers are in constant need of money to sustain their day-to-day agricultural activities and often turn to gold as a helpful resource. They acquire gold not only as an investment for future endeavours like daughters’ marriages or capital expenses but also as a precautionary measure against unforeseen challenges like crop loss and illnesses. They turn to informal lending institutions, which charge exorbitant interest rates, where gold becomes a key to unlocking much-needed liquidity. Thus, understanding the dynamics of gold prices becomes imperative in deciphering farmers’ financial landscape.

• India possesses a longstanding history of gold mining, but it’s been at a low level. In 2020, only 1.6 tonnes were produced, and there hasn’t been much change since then

As per the latest NSSO data, 36.9% of marginal farmers still obtain loans from informal sources, while it is 19.6% for medium-sized farmers and 31.6% for large farmers.  Furthermore, our analysis of NSSO data (Situation Assessment of Agricultural Households and Land and Livestock Holdings of Households in Rural India, 2019) underscores a distinct divergence in borrowing patterns, with small and marginal farmers predominantly seeking assistance from professional moneylenders and/or relatives, while larger farmers lean towards agricultural and professional moneylenders.

Moreover, the purpose behind loans diverges between small/marginal farmers and larger farms. While capital expenditures in the farm business constitute a substantial portion of loans for large farmers, small and marginal farmers allocate a significant portion of their borrowed funds towards non-agricultural expenses like marriages & ceremonies (see infographics). Notably, a considerable fraction of these loans is directed towards purchasing gold for ceremonial occasions, suggesting a trend where surplus funds are diverted from agricultural investment to personal expenses, particularly among small and marginal farmers.

The recent surge in gold prices spells trouble for farmers, especially in rural India, where 60% of the nation’s gold is purchased (World Gold Council). Rural demand plays a major role in India’s demand for gold, which is closely tied to the performance of the monsoon season. Against a backdrop of inflationary pressures, unpredictable monsoons, and dwindling government expenditure, farmers, many of whom lack formal education, turn to gold as a safeguard against volatility and uncertainty. The recent times have led to the farmers grappling with uncertainty over future gold prices. After hitting a record high of Rs 73,029 per 10 grams on April 16, gold prices dropped 2.11% on 27 April, primarily due to an improvement in the value of the rupee by 20 paisa against the dollar in one week.

Various international agencies, including Goldman Sachs, Citi, ANZ, and Commerzbank, have raised their forecast prices of gold by 3-5%. Mike McGlone, a strategist for Bloomberg Intelligence, projects that by 2025, the value of both bitcoin and gold, the ‘digital version,’ will rise.

In such circumstances, it is likely that farmers will not go for gold and instead prioritise investing in tools and machinery for farming operations. Rational farmers might utilise the extra money they have to buy equipment like sprayers, ploughs and drip irrigation. A few small and marginal farmers might start poultry and goat farming on a smaller scale. Though at a minimal level, this would help boost productivity.

“Those who possess gold are often torn between capitalising on market opportunities or preserving it in the hope of further appreciation. It’s a delicate balance influenced by both economic trends and deeply held cultural traditions. Thus, high gold prices are going to push them to buy risky assets or investments,” says Dr Naresh Bodkhe, Director (Economics), Competition Commission of India.

The increase in the value of gold will undoubtedly affect farmers’ choices regarding whether to allocate their funds toward productive or non-productive endeavours. However, a larger portion of their investment will likely be directed towards non-productive purposes.

 

Gold holds immense significance in the lives of farmers, shaping their aspirations and financial strategies. A surge in gold prices can disrupt plans for saving towards cherished events like their daughters’ weddings or safeguarding against unforeseen circumstances

Dr NareshBodkhe, Director (Economics), Competition Commission of India

Despite improved rural banking, farmers still struggle to access loans, often resorting to pledging gold for quick funds. The surging gold prices threaten their financial stability, impacting essential expenses

Prof Sangeeta Shroff Vaikunth Mehta,  National Institute of Cooperative Management,  Pune

(DrKedar Vishnu is an Assistant Professor of Economics at NarseeMonjee Institute of Management Studies, Mumbai. Dr Vaishnavi Sharma is an Economist with a PhD from Indira Gandhi Institute of Development Research [IGIDR], Mumbai)