All That Glitters Is Indian Gold
By Uday Pai
09 Aug 2006 at 12:18 PM EDT
resourceinvestor.com
NEW DELHI (ResourceInvestor.com) -- India's affinity for the yellow metal is both historic and legendary. Indians have always loved gold, not just because of the adornment value, but it is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits.
Tensions in West Asia, rise in crude prices, bomb blasts by Islamic terrorists in Mumbai and many other factors have again made gold a darling of the Indian commodity investors.
According to market pundits, the gold fundamentals remain bullish in India. Sunil Kashyap, managing director of ScotiaMocatta said there is enough liquidity to support gold prices.
He said gold fundamentals will remain bullish though the price may see some correction. Kashyap said gold has a strong support at $540-550/oz, which could further rise to $625/oz. According to him, silver may touch $9/oz before climbing to $11/oz.
“For gold, we are looking at a range of $540-550 for the next couple of months, which seems to be a very strong support level and we should see it slowly trading above $600-625,” said Kashyap.
But, the gold sellers said they witnessed a fall of anywhere between 5%-30% during last month (July), when deadly serial bomb blasts in India's financial hub Mumbai worsened sentiment already hit by price spikes. Prices touched a peak of $676 an ounce in mid-July on geo-political tensions in the Middle East, fell to $601.60 on profit-taking in the fourth week, but took the upward path soon after. Sandwiched between two high-demand seasons, July is traditionally a lean time for gold sales.
In fact, the Indian consumer demand for gold fell 27% to 145 tonnes during the first quarter of 2006.
“This was largely driven by the sensitivity of the Indian market toward price volatility,” the World Gold Council (WGC) said.
Jewellery demand reacted sharply to price volatility, falling by 38% over the year-ago period that saw strong demand.
“Sentiment within India became increasingly attuned to the belief that gold prices would continue to rise, thereby providing some support to consumer demand in the jewellery market,” the WGC said.
“The biggest issue was not so much the price itself, but the volatility,” said Rajan Venkatesh, marketing director of Bank of Nova Scotia. “Year on year, ballpark figures show July sales may be down about 25% (for the bank).”
The Indian Psyche
Industry watchers say India will continue to buy at even higher prices as long as they remain stable and consistent.
Investors hate volatility. If prices are stable, physical demand will remain. Indian households have always preferred to invest in physical assets like property and gold.
Although demand fell, net retail investment in India grew by 32%. This was on account of two factors - increased promotion by banks following the success of earlier WGC-assisted campaigns; and the general belief that prices will continue to rise. Individuals bought gold coins and small bars with the view of turning them into jewellery at a future date.
According to Suresh Nair, Vice President of Kotak Commodity Services Ltd, “Investment demand is investment in gold bar. Predominantly they go in for gold bar and expect investment demand to pick up. Gold is an alternative asset class and a good hedge against inflation. We expect the price of gold to touch $267 plus per 10 grams in the next 2-3 months.”
“We expect the gold price to touch $244 for 10 grams in six months,”Vivek Bajaj of Mars Comtrade Pvt Ltd said. “There seems to be enough headroom for gold prices to continue a bullish trend in the long term. Moreover, rise in crude prices, strengthening of inflationary pressure and signs of stagnation in the real estate market make gold an investor's choice.”
Indian investors have the option of buying physical gold and keeping it in demat form. They also have the option to participate in the gold rally by paying 7%-8% of the contract value.
World's Largest Consumer of Gold Jewellery
India has surpassed Italy and is now officially the largest gold jewellery producer in the world. Confirming the development, Federazione Nazionale Orafi Gioiellieri Fabbricanti Aderente a Confindustria or Federorafi, which is the federation of Italian jewelers said India has relegated Italy to second place in gold jewellery production.
Federorafi said India surpassed Italy due to “competitive production costs, better access to global markets due to lower customs tariffs, good product quality and a huge internal market,” which they say is not accessible to Italian/European goods due to high tariffs and due to administrative barriers.
According to data from the precious metal consultancy, GFMS Ltd, India with gold jewellery production of 539 tonnes in 2005 was numero uno followed by Italy with 228 tonnes. Third spot went to China with 198 tonnes and Turkey was fourth with 197 tonnes. If scrap gold is included, India again emerged as No 1.
Almost 60%-70% of gold jewellery is being sold during the wedding and festival season. India has a demand for 800 tonnes of gold per annum for creation of gold jewellery. Of this 800 tonnes, two-third is imported. According to the World Gold Council, recycled gold now accounts for 30% of gold consumption in India.
The country has been on the forefront, making an indelible mark in the global diamond and jewellery market year after year. From being a leading diamond manufacturing centre, India has rapidly advanced on the path of becoming the global hub for gems and jewellery. With the plain and studded jewellery sector growing at 15%-20% per annum, the total gems and jewellery exports of the country has witnessed exponential growth in the last five years, with exports increasing from $7.779 billion in FY01 to $15.707 billion in FY05, making the industry one of the country's largest foreign exchange (forex) earners.
Some key factors:
India is the biggest consumer of gold in the world with an annual consumption of 700 tones.
India is the world's largest consumer of gold jewellery
India contributes about 20% to the global demand for physical gold
Roughly 30% of gold jewellery fabrication is from recycled pieces
India is typically also the largest purchaser of coins and bars for investment
At just over one gram of demand per thousand dollars of GDP, India stands third in the world, behind only the UAE and Bahrain
How much gold is there in India? This is a quintessential question, but the answers are many. The official estimate puts the figure at around 13000 tonnees, although much higher estimates range between 15,000 and 17,000 tonnees, as most of the gold purchase is happening with unaccounted (black) money.
India is getting an upper hand in global trade. The government has been quite supportive of the industry in introducing policies time and again that help boost exports. |
