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Gold in the Fabric of Life

Indian investors don't think of gold in the same way as Western investors...

WHILE ALL ANALYSTs agree that Gold Investment demand is and will be the driving force behind the market  in 2009, many feel that jewelry and Indian import demand are important too, writes Julian Phillips of the

Both have declined for the foreseeable future because of the current high price for gold. But April and May have seen demand from these two areas start to pick up. Will this returning demand persist as the Gold Price rises?

We feel that it would be a mistake to write off jewelry demand and Indian demand because of high Dollar prices. Here are our reasons for believing so.

In the West all investors place profits in the center of their investment screens. To date, investments are all about building wealth, so that as one bumps into old age one will have enough to carry one through the remaining years when faculties wane and are insufficient to provide for the future. Gold has not been part of that picture since the early Eighties, not until the last three years on the Pension front. Even now, as an investment, it is treated with caution, but that is changing.

Another Western perception is that gold in jewelry is used only to enhance the beauty of a piece, complimenting diamonds or other stones it supports. At the cheaper end of the market a gold appearance is enough. At this end of the market the gold content of a piece of jewelry is miniscule, likely only 'rolled gold' alloy covered in a fine layer of gold or 9-carat jewelry (only 9/24th pure gold). Better pieces rise to 18 carat (some 75% gold and the balance some alloy). A pure gold piece tends to be shunned because it is too soft for jewelry and over time, wears away.

At least this is the story put forward. So as the price of gold rises, it becomes too expensive for poorer folk to buy. With jewelers having made a living out of this end of the market, all attempts have been made to keep prices down by lowering the gold content further and perhaps switching to other metals where saleable. As disposable income fell in the developed world in the last two years, so did the demand for cheaper gold jewelry. It was one of the first items to be chopped from the budget when this happened. So we have to ask, "Is this the end of that type of market with prices attacking $1,000 again?"

We believe not! And there are two reasons for that belief.

The first is that we do believe that there will be a dramatic recovery in the developed world's economy, increasing disposable income quickly. This of itself will bring back the demand for gold jewelry. It is before a new car on a rising budget.

A second reason is that gold will be recognized as a statement of wealth in inflationary times. Gold was sidelined for a full generation, but, as the price of gold rises to new heights, we believe it again will come to be seen as a statement of wealth in jewelry. Why can we be so sure, you may well ask? A look back over the last few thousand years shows us that the inherent quality of gold makes it the most desired of metals. Keen to show elegance and wealth savvy lassies will want to be decorated with gold pieces as in the past. So the recovery of the gold jewelry market in the developed world should come alongside the economic recovery that is just beginning. But this time round, gold jewelry will be treated with great respect, as inflation takes off.

Will Indian demand for gold recover? The Indian Gold Price has dropped back from 15,000 Rupees per 10 grams to Rs.13,870.72 and is currently Rs.14,810 for 10 grams. Is now the time to buy and make a profit in gold, in India? Wrong question!

Gold to an Indian investor is not simply a good investment. Indian investors just don't think of gold in the way a Western investor would think. The concept of 9-carat gold piece of jewelry would be considered almost fraudulent to them. Gold should be pure and should have its value measurable by weight alone.

To Indians gold is real money. It represents financial security, a future for their families. It is an escape from oppressive government officials in a country where government officials are renowned for their corruption and heavy-handed ways. To be transparent in business with the banks handling their funds is foolishness to them. They deal in cash and avoid any exposure that makes them vulnerable. It is their culture and one that has served them well so far. Even Indians living in different countries continue with these practices. And with gold having risen since the turn of the century there is little to contradict their trust in gold.

Add to that often fervent attention to gold in local religions, led by Hinduism, and you have in gold part of the very fabric of their lives. The last Hindu festival on May 29th, Akshaya Thritiya, was one where anything bought on that day would appreciate in value. Gold is wealth, with religious connotations that will keep India consumers Buying Gold so long as their culture persists.

Indian gold investors are gold holders for the long haul, so they will buy as long as they have disposable funds available. But they need to know where the 'floor' price of gold at any time is, so that when they buy it doesn't fall straight after buying. They have no exit price as such. Yes, if they believe it has risen too far and is likely to fall, they will then sell some of their gold, but with a view to buying it back once the 'floor' price has been re-established. It is all a matter of price. That's why there's been such a large volume of scrap gold. Once this is exhausted they will turn back to the buy side of the market.

The Gold Price holding or falling will discourage scrap selling. Once this has happened market supplies will drop quickly. Should investment buying and central bank buying continue, we must ask, "Will there be sufficient supply or must the price rise again to bring more out of the cupboard?"

Gold mines can't ramp up supplies quickly, so scrap is the only source easily and quickly available. Also with a rising price, the higher the price the less gold new purchases will buy. But India's concept of the Gold Price is in Rupees of course, not in US Dollars, so when the Rupee depreciated on the forex market it meant a rising price, with the Rupee price going from under Rs.10,000 to over Rs.15,000 for 10 grams. That had Indian investors reaching for their old gold jewelry and selling it. But note now that the Rupee has appreciated almost 10% against the US Dollar in the last month, taking care of $90 of the recent appreciation.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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