Why Gold Jewelry Demand Will Continue To Decline Indefinitely

Jewelry is a very big component of total gold (NYSEARCA:GLD) demand, representing more that 50% of demand for gold worldwide.

Over the past several quarters however, demand for jewelry has been falling, even as the price of gold is down by almost 50% since the highs of recent years. As a result, jewelry demand represents headwinds for gold demand.

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As you can see, the data from the World Gold Council (the official lobby group for all things gold), jewelry demand for Q3’16 was down 21% Y/Y.

However when we breakdown jewelry demand at the country level, we will see some interesting data.

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Please note that India usually accounts for about 25% of global jewelry demand. However in Q3’16 it accounted for 34% of total demand.

Please also note something else; while Middle East demand was lower by 24% Y/Y, Egypt was down by 50%. Now Egypt is a small part of overall demand, but it’s important to make a note about jewelry and the cultural link with gold in many Arabic countries.

You might not know it, but to this day in many parts of the Arabic world, when a women gets married she usually get a dower in gold. For example in many countries (especially North Africa), when a women gets married, she goes of to her new husband with a belt that is 100% gold.

The reason is that if her husband was to divorce her, at least she will have some gold to sell so she could live. The takeaway from this little point is that, while the belt counts as jewelry, in reality it’s money, or a store of money.

In many parts of the world people do not have access to banking or sophisticated brokerage accounts. They can neither put their money in the bank, or buy an ETF to invest. As a result, in many underdeveloped parts of the world, plain old jewelry made of gold is the only choice.

Takeaway

In many parts of the world, jewelry demand coincides with investment demand, thus distorting the real demand for jewelry.

Now if one looks at jewelry data for India, he will be amazed at just how much gold Indians spend on jewelry. For Q3’16, gold demand for jewelry in India was 154 tons, when total gold demand for jewelry in the U.S. was only 26.2 tons.

My suspicion is that most of this gold does not go towards jewelry in the traditional sense. Meaning, a lot of it is used to make jewelry as a means of storing value. And this is the reason why I think gold demand for jewelry in India will be negative for many years to come. How so?

Because in the future, more and more people will be using the banking system to store their money and not gold. The reason is simple, in many parts of the world, banks did not exist until recently.

While the average person in the West has had banking services available for the better part of 100 years, people in many parts of the world did not.

With technology on the rise, banking will be available even in the most rural areas of countries like India. People will not need to store value in gold or jewelry anymore, they will simply use banks.

Their money will be readily available anytime, and they can use a whole sort of devices to transfer it or make purchases. There simply is no competition with gold.

So while making a gold belt for a marriage might still be a tradition in Morocco, saving money in gold or jewelry is not. In other words, as more and more people in third world rural areas come out of the gold dark-age, they will be using the banking system more and more, and that means they will need to hold gold or jewelry less.

Anywhere one looks, he sees the financial transformation of India:

According to business-standard.com

India could see credit and debit cards becoming redundant as by 2020. As more people adopt the government’s Aadhaar Payment Bridge System (OTC:APBS) which will allow authentication of payments with nothing more than a user’s fingerprint.

From the Times of India:

NOIDA: The GB Nagar district administration may place a demand for more bank branches and ATMs to enroll and manage fresh accounts of over three lakh factory workers who are to be enrolled into the banking system.

Claiming that the existing number of banks with their existing staff members may not be adequate to handle the pressure of additional customers in the future, N P Singh, the district magistrate of GB Nagar, on Friday created a committee to look at the ground reality of the district’s banking needs.

From pymnts.com:

JPMorgan Chase is expanding across India following approval from banking authorities in the country.

Reports on Friday (July 1) said JPMorgan received clearance to open three new branches in the nation. In a statement, the bank’s chief executive for South and Southeast Asia, Kalpana Morparia, said JPMorgan has “a great commitment to this country.”

The three new branches will add to the company’s existing single branch, located in Mumbai. According to Morparia, expanding its presence is an effort for JPMorgan to strengthen its position among multinational corporations in India, as well as local firms trading internationally.

Reports pointed to the recent departure of other U.S. and foreign banks from India. Only a “handful” of the 46 foreign financial institutions that have launched operations in India have managed to build a “sizable business,” reports said.

Via Mashable

Paytm announced today it has received regulatory approval from the Reserve Bank of India for launching Paytm Payments Bank, a move that “changes everything” for the company.

Our aim is to build a new business model in banking industry, focussed on bringing financial services to 100s of millions of un-served or underserved Indians,” said founder and CEO of Paytm, Vijay Shekhar Sharma.

“With power of technology and innovation-at-scale, we aim to become a benchmark in world of banking,” he added, stating his intentions of taking full-time executive role in the Bank.

The “Payment Banks” is an initiative from the Indian government, first unveiled in 2014, that cuts the need of going to traditional branches and makes nearly every bank operation accessible from a smartphone. Through this move, the government seeks to bring digital banking services to much of the country’s unbanked population.

Please note the wording in the above text:”100s of millions of un-served or underserved Indians”. In other words, to this date, there are still hundreds of millions of Indian citizens who either do not have access to banking services at all, or they are underserved.

Bottom line

India’s gold jewelry demand has less to do with jewelry in the traditional sense as we know it. While Indians wear a lot of jewelry, a big portion of that has to do more with investment and storing value than anything else.

With the expansion of banking in India (and many other rural parts of the world), more and more Indian citizens will have access to banking services. Therefore gold, silver (NYSEARCA:SLV) and jewelry will be used less for investment or storing value.

Gold demand for jewelry in India is the lowest in over a decade, and I think this trend will continue. I do not think it’s unconceivable for gold jewelry demand in India to fall by 50% over the next decade.

This could mean a slack of 300 tons of gold or more on a yearly basis. The only other demand component that could fill this gap is investment demand.

If investment demand does not increase by at least this amount, then for the foreseeable future, gold and gold miners (NYSEARCA:GDX) (NYSEARCA:GDXJ) face a very serious and long term headwind.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.