Investors are well aware of many of the reasons for having gold as part of their portfolio. Lately, these reasons have swirled around macroeconomic concerns — the U.S. debt rating downgrade, possible sovereign defaults in the eurozone and the possibility of more money printing from the Federal Reserve via a third round of quantitative easing.
 
But this summer, a new factor has entered the gold market…

What is especially notable about this is that summer is normally a doldrums period for gold, where little happens. Yet it has pushed through $1700 an ounce. This new market force has been one of the key drivers underpinning the current rally in the gold price — but it has gone largely unnoticed.

It is a factor that has changed the game for gold for years to come. It’s a change that will make gold bulls very happy.

What is this new factor? For that we have to look half a world away, to India.

India’s changing buying patterns
Traditions arose centuries ago in India of accumulating gold, using it for jewelry and other ornaments, and giving it as gifts for special occasions such as weddings. These traditions have continued to today, particularly in the rural regions of India. So it should come as no surprise that India is the world’s largest consumers of gold. According to the World Gold Council, India consumed 963 metric tons of gold in 2010, and consumption is expected to exceed 1,000 metric tons this year.

Traditionally, the country always bought gold in seasonal patterns. These patterns normally followed the festival calendar, with Akshaya Tritiya in May and the festival of lights, Diwali, in September, being peak buying periods. Also, the traditional wedding season, which runs from September to December, led to increased buying.

So in the past, gold has been a lackluster market in the summer, due to this lack of demand from the world’s biggest consumer of bullion. However this summer, the scale of buying of precious metals from India has shocked traders.

Recently, India’s state-owned trading company, Minerals and Metals Trading Corp., said it would import 350 tons of gold and 1,200 tons of silver in 2011-2012 as demand for the precious metals continues to rise quickly. The company stated that imports for silver and gold  in India this year will be double that of 2010.

This estimate may be conservative, however, due to a change occurring in India that has gone little noticed by most American investors.

A new source of demand
India’s economy is growing rapidly, with GDP expected to grow in excess of 8% this year. This has led directly to the growth of a middle class in India. The growing wealth in the country is lifting demand for gold. Simply put, more Indians can now afford to buy more gold.

This is not really unexpected, but here is the key change in behavior: wealthier middle-class Indians are starting to invest in precious metals more like some of their developed market peers. Indians more and more are looking at gold as a financial asset by putting a fixed portion of their wealth into gold and buying gold on any dip in price. For example, the purchase of gold ETFs in India for July rose by 82% year-over-year. Net gold ETF inflows have risen for 14 consecutive months.

With India battling high inflation, gold is becoming a popular means of wealth preservation, just as it has in China. According to the World Gold Council, India and China accounted for 58% of global physical gold demand in the first quarter of 2011.
 
This is a trend that looks set to continue. The days of acquiring gold only during festival and wedding season are over for most Indians, ending the seasonal demand for gold coming from India. Instead, it is being replaced by a sustained, steadily rising demand for the precious metal.

Being aware of this change can put you far ahead of other investors who are not aware of this huge new source of demand.

Action to Take –> The change in consumer behavior in India regarding gold looks to be a long-term change. India’s current population is about 1.2 billion people. The middle class is already about 50 million in size. This figure is expected to grow tenfold by 2025 according to the U.S. State Department, thanks to India’s expected annual GDP growth rate of between 7% and 10% during this period. And with more middle class Indians that can not only afford more gold for the traditional festival season, but also for investment purposes, this only bodes well for demand for gold in the years ahead.

There are many ways for investors to play this, but perhaps the easiest way is through the purchase of exchange-traded funds (ETFs) that hold gold bullion. Among the ETFs investors should consider buying on any short-term weakness in the gold price are the SPDR Gold Trust (NYSE: GLD), the Comex Gold Trust (NYSE: IAU) and the ETFS Physical Swiss Gold Shares (Nasdaq: SGOL).

Indian investors are buying gold on any short-term weakness. U.S. investors should consider doing the same.

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