Record high gold prices in India are weighing on demand for gold jewellery, which could increase demand for cadmium-containing imitation jewellery, but substitution faces challenges.
With gold trading close to record highs in US dollar terms and the dollar holding strong against the Indian rupee, gold prices are holding around record levels in India. That has affected the country's imports of the precious metal, which fell by 36.98pc in rupee terms and 4.48pc in US dollar terms in April, data from the commerce and industry ministry show.
Indian gold jewellery demand fell by 17pc year on year during the first quarter to 78t, the weakest first quarter since 2020, according to a World Gold Council report, even as global demand was little changed at 478t. Indian demand fell by 65pc from a strong fourth quarter.
"Indian consumers are keenly aware of — and sensitive to — moves in the local gold price. We had already reported that demand in [the fourth quarter] slowed sharply as the price rocketed in December, and this trend continued into January as local prices reached fresh highs," the report said. "The price has also encouraged a rise in smuggling activity, incentivised by an avoidance of import duties. This has reportedly encouraged demand in smaller cities, and among independent retailers, where cash purchases are more commonplace."
Demand for lower-priced 18k gold jewellery gained popularity during the quarter, and the high prices have made imitation jewellery more attractive. The Indian government introduced a new gold jewellery hallmarking system from 1 April to help enforce a decade-long ban on sales of KDM gold, a type of alloy containing 92pc gold and 8pc cadmium. The cadmium in KDM makes gold jewellery more durable and less prone to tarnishing or discolouration, which helps to retain its resale value. Gold jewellery is often bought and gifted in India as an investment, or store of wealth, during the wedding and festival seasons.
India has accounted for around 50pc of global cadmium imports in recent years, according to the International Cadmium Association. Imports reached 9,639t in the financial year to March 2020 before sliding to 8,249t in 2021 and 6,785t in 2022, trade ministry data show, as domestic production increased.
Cadmium's toxicity prompted the government to ban KDM, permitting the use of zinc, indium, or gold for soldering. Yet jewellery makers continue to use cadmium, particularly in imitation pieces favoured by buyers who cannot afford the higher cost of pure gold.
But cadmium prices too have hit historically high levels, owing to constrained supply. European prices have only edged down slightly in recent weeks while prices in India have held at highs around Rs415-420/kg over the past month.
The World Gold Council expects Indian jewellery demand to "remain muted" during the second quarter. "Rural demand — a key source of gold jewellery demand — remains fragile and persistent inflation is likely to continue to impact consumer sentiment." But there are signs that consumers have started to adjust to the higher prices, as "early estimates suggest that buying during the highly auspicious Akshaya Tritaya festival was only modestly weaker compared with last year's exceptionally strong levels," the report said.
By Nicole Willing