Indians ditch stocks for safety in gold
ANUJ CHOPRA
Special to The Globe and Mail
November 5, 2008
theglobeandmail.com
PUNE, INDIA -- Whenever Sandeep Bhujbal, a 35-year-old government clerk, isn't sure where to invest his hard earned money, he goes on a shopping spree.
On a recent broiling afternoon, with a cash-laden pouch tucked under his arm, he dashed to the heart of Laxmi Bazaar, an old crumbling market in Pune, India, negotiating narrow, grimy lanes swarming with honking cars, cows, and hapless pedestrians.
Doors of a lavish, air-conditioned showroom swung open to him, leading to rows of showcases replete with gold bangles, earrings, nose rings, and sideboards sparkling with ornate gold necklaces, bracelets, and anklets.
"In these turbulent times, the stock market is going down, mutual funds are going down, real estate is going down. So where should one invest?" said Mr. Bhujbal, who is loath to reveal the exact value of his purchase in the showroom. "Gold is a sound investment."
As stock values drop precipitously - the Indian Sensex which kissed the 21,000 mark in January has nearly halved since then - experts say a belief reigns among Indian investors that gold is the only safe investment amid the financial turmoil.
India has a voracious hunger for the precious metal that cuts across economic classes. It's customary to present gifts of gold, not just at festivals, but also at the birth of a baby. Parents and in-laws traditionally give gold jewellery as wedding gifts to the bride. Gold is also heavily sought in rural India, where due to low penetration of banking services, people often convert their savings into the yellow metal.
The Indian appetite for gold can have a substantial influence on the price of the metal, and on the fortunes of producers around the world.
The country is the largest single market for the precious metal, much of it in the form of jewellery. It consumes about a quarter of global production - 700 to 800 tons a year. Because 99.6 per cent of that is imported, demand is sensitive not only to international prices but also to fluctuations in the value of the Indian currency, the rupee.
For a year until March, 2008, as international gold prices soared and the rupee remained weak, India's gold imports slumped by a whopping 23.4 per cent, according to the Bombay Bullion Association. High gold prices prompted many Indians to sell their gold and cash in on profits.
Since then, plummeting prices combined with the arrival of a festival and the coming Hindu wedding season may be setting the stage for a recovery in Indian demand.
Gold prices reached a record high of $1,080.30 (U.S.) an ounce in March, before falling more than 20 per cent to a low of $773.90 an ounce in August. Analysts predict gold may average at $900 an ounce in 2008 and $950 next year, down from forecasts of $950 this year and $1,000 next year.
In the first 20 days of October, the All India Gems and Jewellery Trade Federation registered a 66-per-cent rise in gold sales all over India. And sales are continuing to soar as Dhanteras - an auspicious day in the Hindu calendar - and the Diwali festivities kicked off last week, both propitious occasions to splurge on gold.
The popularity of gold and the tendency to hoard it are engrained in Indian society, despite soaring inflation, persistent rupee depreciation, and a continuing liquidity crunch.
Roughly 15,000 tons of gold is squirrelled away in India's private family vaults, according to McKinsey and Co. This is nearly double the gold reserves maintained by U.S. Federal Reserve.
According to the World Gold Council, India's gold consumption this year could cross the 1,000-ton mark for the first time.
"At the moment, gold is the only product that looks set to give a much higher return over the next 90-day period," said Parag Gadgil, 48, a sixth-generation member of the family that owns the 175-year-old P.N. Gadgil jewellers. In recent days, there have been several investors, he says, who withdrew their money from stocks and mutual funds and invested in gold.
"Gold prices don't fluctuate as sharply as shares in a volatile stock market," he said. "If gold prices dip today, they'll hike up tomorrow, giving investors good returns."
Several analysts say that Indians need to kick their gold-buying habit because it is encouraging a nefarious "black economy," as people divert vast sums of undeclared cash income into gold, far from the prying eyes of tax-inspectors.
According to Arun Kumar, author of The Black Economy in India, India's black economy is nearly 50 per cent of GDP, though government estimates are far more modest.
This addiction to the metal is also hurting India's growth prospects, some analysts say. If, instead of locking away annual savings in gold, Indians were investing them in productive business assets, Morgan Stanley estimates the country's GDP growth would be higher by 0.3 to 0.4 per cent.
But not all analysts buy that argument.
"Gold buying does not eat into GDP growth," said Jill Leyland, a London-based economist at the World Gold Council. "Gold is not locked away - it is always easy to sell back, whether in jewellery or bar/coin form, and the gold market generally is very liquid."
Gold in India is primarily sold as jewellery, Ms. Leyland points out, and the jewellery industry is a job multiplier as it supports goldsmiths, artisans and retailers.
Meanwhile, amid a financial crisis, investors like Mr. Bhujbal are reaffirming their faith in gold. With a shrewd eye for a bargain, he started buying in early September, when gold prices plumbed close to 11,000 rupees ($266.25) per 10 grams.
"I'll sell when gold prices touch the sky again," he said. |
