Rainfall and Other Unseen Forces Influencing Gold

The vast ocean of data available to people today reveals an indisputable truth: things are not what they seem. Dive below the surface of the waters and you’ll learn that many unseen forces are pushing and pulling on our market.

Sometime these forces are nefarious. Examples include the misrepresentation of risk during the global financial crises and the inflated balance sheets during the dot com bust. However, some of these unseen forces are simply acts of nature. Consider rainfall and gold.

As we’ve discussed in previous articles at Blanchard, India consumes 849 metric tons of gold per year representing the second largest demand in the world. Only China consumes more and by a small margin. Moreover, the middle class in India is projected to increase to 547 million within the next six years. This has meaning for gold because many expect those joining the middle class to add to these gold consumption figures.

So, where does rainfall factor into this picture? The rural population within India accounts for an estimated 60-70 percent of gold consumption within the country. Rainfall is critical to their way of life. With the right amount of rain those living in rural regions can ensure crop yields and, as a result, their income and their income will influence their ability to buy gold.

In fact, the weather during India’s monsoon season has strong implications for the country’s entire economy. Even when the level of rainfall drops below 90 percent of the seasonal average, the government in India considers the situation to be a drought. When India suffers a dry period the rest of the world notices because the country is the second-largest producer of rice, wheat, sugar and cotton in the world. Consider that in 2009, unfavorable weather forced India to import sugar. As a result, global prices spiked, and inflation followed. The monsoon season even has implications for the country’s power grid. With more rainfall comes better irrigation and more substantial hydropower output.

India’s rainfall is a reminder that many of the factors underpinning movements in the price of gold are things we rarely consider. For example, the strength of India’s currency, the Rupee, also has a major influence on gold prices. Much of the gold demand within the country is satisfied with imports. When the value of the Rupee, relative to other global currencies, falls imports generally decrease and gold follows.

Additionally, the festival and wedding season in the country influence gold purchases given that many people in the country buy gold for these occasions. Gold has a major place in the country’s cultural legacy. Gold is a common wedding gift and carries far more religious import in India than any other country.  

As the world becomes a global marketplace and economies exact increasing influence on one another, previously ignored factors like rainfall in India will become important to savvy and strategic gold investors.