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India's gold market crashed within the first half of the yr. That is what the second half seems like

A woman tries a gold earring in a jewelry showroom in Mumbai, India on October 28, 2016.

Danish Siddiqui | Reuters

The recovery of the Indian gold market remains uncertain in the second half of the year, dampened by factors such as record prices for the metal, the World Gold Council told CNBC.

India is one of the largest gold markets. The precious metal plays an important role in Indian culture – it is considered cheap to buy gold on festive occasions or to give it away at weddings. It is also seen as a symbol of wealth and a safe investment.

The demand for gold usually rises in the second half of the year when major festivals like Diwali and Dhanteras and the wedding season take place, said Somasundaram PR, general manager of India operations at the World Gold Council.

"It's hard to say how things will play out this year as there are several factors that will affect the recovery – the trend of the pandemic, disruption from local lockdowns and price outlook," he told CNBC via email.

The demand for gold fell

Gold demand in India fell in the first half of 2020. A report by the World Gold Council in late July said Indian jewelry demand fell 74% year over year to 44 tonnes in the three months ended June when spending on gold jewelry fell 74% year over year. It was the lowest quarterly total in its history.

The decline was due to a nationwide lockdown designed to slow the spread of the coronavirus outbreak, as well as higher gold prices and uncertainties about future earnings, according to the report. Gold demand in India for the year is projected to fall to its lowest level in 26 years.

When it comes to coronavirus, India is the third worst affected country in the world with more than 2.6 million reported cases of Covid-19, albeit with a relatively higher recovery rate. Many states have placed additional bans to slow the virus down. Economists have warned of the potential difficulties in achieving a sustainable recovery.

Somasundaram said gold demand will play a vital role in India's economic recovery.

He said there is a sense of optimism in the market that people could learn to live with Covid-19 and that it could potentially boost consumer confidence and demand for jewelry. Organized jewelers who know how to work safely in a coronavirus environment should be better able to adapt to changes in shopping behavior, he said.

A good monsoon season could also help boost gold demand in rural India while people could channel their savings and other expenses into the precious metal, he said.

According to Radhika Rao, an economist at DBS Group in Singapore, retail jewelry sales account for more than two-thirds of total gold demand in India.

This recovery "depends on how quickly the epidemic curve can be flattened for the recovery to take hold and on (gold) price developments," she told CNBC.

Rao added that factors driving the price of gold higher around the world – including negative real interest rates, loose fiscal policies and a weak dollar – remain at play. "The persistence of the recent surge in US yields is now being watched closely by the bulls of the metal," she said in an email.

But there are risks. First, social distancing rules could restrict, postpone, or cancel weddings and other celebrations, which in turn could affect demand for jewelry Somasundaram of the World Gold Council. He went on to say that the current cost of gold is hindering purchases as prices have increased nearly 50% since early last year while people's incomes have not.

Spot gold traded at $ 1,992 an ounce on Tuesday. Data from the World Gold Council showed that the price of gold in India was above 148,077 rupees ($ 1,980.55) an ounce on August 17.

Millions of Indians have lost their jobs or cut their salaries as part of the economic fallout from Covid-19 and the nationwide lockdown.

"The crisis we are facing does not lend itself to forecasting with any degree of confidence," said Somasundaram.

Investor interest

Investors, on the other hand, are adding more gold to their portfolios both worldwide and in India. These allocations result, at least in part, from low or negligible interest rates and "enormous liquidity" in the system.

Data shared by the World Gold Council said gold-backed exchange-traded funds saw positive flows globally for their eighth straight month, adding the equivalent of around $ 9.7 billion, or 4.1%, of allocated assets in July. In India, $ 98 million flowed into gold ETFs last month, totaling $ 1.51 billion.

"Investors are drawn to the liquidity and safe havens of gold in these times, and some expectation of price spikes has stimulated investing too," said Somsundaram.

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