One of the most striking news in gold markets during the current month was the fall in gold imports by India during June 2008. The imports by the world's biggest bullion importing nation in June fell by 68% from a year earlier as high prices eroded demand from jewelers and investors. Purchases declined to 24 metric tons from 74 tons, according to the provisional data compiled by the Bombay Bullion Association Ltd., an umbrella organisation representing 230 trading companies. Prior to this India's gold imports had slumped over 59 percent year-on-year in May, as high prices dented demand for the yellow metal.

What is causing the fall in imports? The simple answer is: Indians are losing their gold buying capacity. This may come as a shocker to most people, given the fact that these days the media - both paper and electronic - is filled with reports about the rise of India and the strength of the Indian economy. However nothing can be far from the facts. While it is true that the creamy layer of the Indian society has lots and lots of money, with many Indian billionaires figuring in FORBES, the vast majority of the country's population doesn't have enough to make ends meet. Up to 400 million people in India live on less than a dollar a day. A further 500 million live on less than two dollars a day. In total, 900 million people (80% of the population) live in conditions of abject poverty, and are certainly not in a condition to buy gold.

Let us look at it another way: a great majority - about 70% - of Indians depend on farming, a profession that is an out-and-out losing preposition. Due to numerous factors, which are beyond the scope of this article, the farmers are unable to make a decent living. While the cost of farm inputs is rising due to an unprecedented boom in commodities sector, their produce prices are controlled by the government, thus capping their profit margins. Most farmers also have to cope with uncertain weather conditions, given the fact that irrigation is available only to about 30% of Indian farms. Not a surprise most of them are born in debt, live in debt, and sadly, die in debt. Death is often not natural; more than 15000 farmers have committed suicide during the past decade - a fact that illustrates the rural poverty in most shocking colours.

Why farmers are important to gold? Simply because this segment of Indian society has been traditionally a very important buyer of the noble metal. The absence of banks and financial institutions in rural India has been the catalyst for mass scale buying of ornaments. Farmers routinely bought gold after the most bountiful harvest of the year was taken around Diwali, the festival of lights and the period of worshipping Lakshmi, the goddess of wealth. However today this segment of gold buyers is silent. With the farming income falling drastically during past several years, it takes no rocket science to deduce that gold purchasing in rural India has been on a decline. These days I rarely meet a farmer who buys gold after the harvest. Farmers routinely tell me how they used to buy gold in the past and how they are not able to buy it now. (One farmer in a village claimed he was not even buying as much silver today as much gold he used to buy twenty years back.) At the same time, the stories of farmers selling their gold jewellery to buy seeds, insecticides, and fertilisers are all too common.

If the imports during past many years have been reasonably stable, it is because there has been some extra buying from middle class Indians living in the cities. However the middle class today is fairly charmed with paper assets, and is generally willing to shun gold at the slightest increase in the prices. Worse, the middle class is even willing to trade its gold possessions to convert them into paper assets, a phenomenon amply seen during Q4, 2007 and Q1, 2008. At that time thousands of Indians sold their gold (then around $800 an ounce), and invested the proceeds in stock markets. As luck would have it, gold today is quoting at $975/oz. while SENSEX (the most widely followed Indian stock index) has come down from 21,000 to 12,500 today, thus giving an entirely new meaning to the old metaphor "killing two birds with one stone." The sorry state is: even after such a drastic fall in stock indices, there are few middle classers who are willing to invest in gold. They may buy a little gold for their daughter's wedding, but let us make no mistake, they are buying far less gold than their fathers bought during a similar occasion.

What does the future herald? Is India likely to import 700-800 tonnes gold in years to come? I see very little chance of it. The vast pools of wealth in this country are left with great leakage, and savings have been draining out since long. At the same time there is little new wealth creation right now, given the fact that Indian stock markets are currently the worst performers in entire Asia and one of the worst performers among the emerging markets. The wealth creation is also not happening via agriculture or manufacturing. Industries after industries are closing down, and a whole lot of consumption is met by imports from China. While it is difficult to find one "Made in India" article in the streets in China, Indian markets are littered with Chinese goods, thus making India a "nation of shopkeepers."

Goes without saying, there is little wealth going to be spared for purchasing gold, something that yields no interest or dividend. (This is another matter that gold has been outperforming a whole lot of interest bearing and dividend paying financial instruments during past six years.) Not a surprise why even year 2007 - the most prosperous year in the history of this nation - did not see any drastic increase in gold imports. India imported 722 tons of bullion in 2007, less than the 1,000 tons estimated by the World Gold Council at the beginning of the year.

Keeping these facts in mind it should not be difficult to make out that the coming years will see gold imports falling by a considerable degree. Indians are extremely price sensitive buyers, and the days of cheap gold are frankly over. This year gold has been already averaging above $900, and as we go ahead from here, there is little chance that gold price will fall drastically below this level. Since higher prices and a whole lot of turmoil in global economy ensure higher degree of volatility, we should not be surprised to see an increasing number of Indians refusing to visit the neighbourhood jewellery shop. That gold is set to become even more costlier for Indian buyers (on account of a fast depreciating rupee) should only dissuade them from buying something their forefathers bought at every given opportunity.

Price sensitivity is a crucial factor here. In fact the imports during 2007 itself would have been much less, had the prices not been less than Rs. 10.000/10 grams during the first half of the year. (It were the prices at sub-10,000 rupees per 10 gram levels in the middle of the year that sparked off high sales of bullion and led to bullish forecasts for imports.) In order to overcome the price sensitivity the jewellers are increasingly introducing jewellery made of 14 and 16 carat gold against the traditionally popular 22 carat.

The sum and substance is that just as there is concept of "Peak Oil" and "Peak Gold", there is this phenomenon of "Peak Indian Gold Buying". And I think the peak is already behind us. The country's highest ever imports recorded by WGC amounting to 774.4 tonnes were way back in 1998, and I don't think India will ever again exceed that number. In fact I strongly feel India will import less than 500 tonnes within a few years from now. (There is only one caveat to this: that the middle class Indians begin to buy gold as an investment vehicle. Frankly they should be doing this, given the doomed future of stock markets and extremely precarious real estate market, but few Indians with investible funds are considering gold right now. Even the most spectacular fall in the history of Indian stock markets has failed to dissuade them; more and more investors continue to pile in their money in mutual funds and savings accounts.) Goes without saying, the world may have already witnessed the peak in Indian gold buying.

This however should not be a bad news for gold investors and gold industry in general. The international gold price will not fall because the Indians are going to buy fewer necklaces and nose rings. The rising tide of investment demand from around the world will be able to easily offset the fall in Indian demand.

© Shailendra Kumar.

Shailendra Kumar is the author of GOLD: God's Own Currency - India's first book on gold investments. He also heads Commodity Research Group, a research and advisory company based in Mumbai, India . He can be reached at NothingBeatsGold@gmail.com