Precious Metals weekly – El Niño & Indian gold demand

by: Georgette Boele

  • Weather related effects could impact farmer income and inflationary pressures in India
  • Lower farmer income will probably result in lower gold demand…
  • …while higher inflationary pressures could result in more gold demand as safe-haven asset
  • The Reserve Bank of India will likely remain vigilant and might end its easing cycle…
  • …therefore, it is likely that net-net gold demand will decrease in such an environment


What is the Indian monsoon?

The Indian monsoon primarily affects India and its surrounding water bodies. It blows from the northeast during cooler months and reverses direction to blow from the southeast during the warmest months of the year. This process brings large amounts of rainfall to the region during June and July.

source: Britannica


What is El Niño?

El Niño is a natural phenomenon caused by unusually warm ocean temperatures in the Equatorial Pacific, that leads to significant deviations from normal weather patterns. In particular, El Niño can lead to a disturbance in rainfall patterns. The lead time between measured unusual water temperatures and disturbed weather patterns can be as long as one year.

Among these consequences is increased rainfall across the southern tier of the US and in Peru, which has caused destructive flooding, and drought in the West Pacific, sometimes associated with devastating bush fires in Australia. Observations of conditions in the tropical Pacific are considered essential for the prediction of short term (a few months to 1 year) climate variations. El Niño can be seen in measurements of the sea surface temperature.

Source: National Oceanic and Atmospheric Administration (NOAA)


How do these weather effects impact Indian gold demand?

The timely arrival of the monsoon in India (June-September), its distribution and quantity are critical to crop sowing during main summer growing season. Droughts could threaten sugar and cotton crops. The possibility of an El Niño weather phenomenon occurring this year has attracted attention. El Niño conditions usually coincide with a period of a weak monsoon and rising temperatures in India. This could greatly damage agricultural crops in India. On the one hand, weaker crops could result in lower income for farmers. Therefore, there would be less money being available for auspicious ceremonies and weddings resulting in lower demand for gold.

On the other hand, weaker crops could have an upward effect on agricultural prices. If agricultural prices were to rise sharply, gold demand could increase because of it being regarded as an inflation hedge and safe-have asset. The Reserve Bank of India is closely watching the development of the monsoon and its impact on inflation. It might end its easing cycle if inflation pressures start to rise.


What can we conclude from all of the above? The occurrence of El Niño could lower gold demand for auspicious ceremonies and weddings. However, demand for gold for inflation-hedge and safe-haven could increase. We judge that the first effect is stronger so that net-net there will be temporary lower Indian gold demand.