Gold News

Indian Gold Outlook, Nov. 2007

A look at Indian gold demand and the rise of gold ETFs with James Burton, head of the World Gold Council...

JAMES E.BURTON took over as chief executive officer of the World Gold Council in Oct. 2002. Many consider this as an important step in the ongoing development of the WGC as a commercially-driven gold marketing organization.

   Burton revitalized the organization, focusing its mission on marketing the gold industry. He restructured the senior management team, reduced staff overheads and allotted funds for priority programs.

   His leadership helped the WGC build demand for gold jewelry, establish a network of distribution partners, and also create a range of products to attract investors to gold. In addition, the WGC has launched a number of gold-backed exchange-traded funds, including Gold Bullion Securities on the London Stock Exchange in Dec. '03 and StreetTracks GLD on the New York Stock Exchange in Nov. '04.

   Burton came to the job of CEO at the WGC after heading up the California Public Employees Retirement System (Calpers) for eight years. The largest public pension program in the United States, Calpers has $140 billion in assets and 1.2 million participants. Before working for Calpers, Burton was Deputy State Controller for the State of California. During his tenure, Caplers pioneered a more activist approach to institutional investing.

   Here, in an exclusive email interview with Commodity Market magazine, Burton says how important is India to the Gold Market and the WGC...

Commodity Market: India is the world's largest gold consumer but its per capita consumption of gold is less than 0.17 grams because the majority of its people are poor. Yet you see growth prospects for gold sales in India. Why?


James Burton:
India remains the largest international consumer of gold, but we believe there is still excellent opportunity for the market to grow. As the Indian urban middle class expands and wealth began to spread more evenly through rural areas, our market will grow. However, we recognize that the Indian Gold Consumer will have more and more choices to spend his Rupees. We need to continue to communicate the benefits of gold to maintain and grow gold's share of the market.


CM:
What solutions would you suggest against high volatility in the Gold Market?


JB:
Price volatility is caused by a number of factors, which are not under the control of the World Gold Council. A gentle rise in Gold Prices are good for gold jewelry demand, as people like to see the value of their purchase increasing. But high volatility can make people nervous about buying until they see the price stabilize. However, while gold may experience periods of volatility, it is less volatile an asset than many people believe, and certainly less volatile than any other commodity.


CM:
What roles does your organization play in ensuring that gold is a safe investment?


JB:
It is not the WGC's role to ensure prices or the safety of gold. However we do work to ensure fair and easy access to gold investment. Gold's safe haven characteristics are inherent in the metal itself, and not artificially supported. In uncertain times, there is typically a 'flight to quality' as investors seek to protect their capital by moving it into assets considered to be safer stores of value. Gold is among a handful of financial assets that do not rely on an issuer's promise to pay, offering refuge from default risk. It provides insurance against extreme movements that often occur in the value of traditional asset classes in unsettled times.

CM:
What should India do to have better liquidity in the market as well as to make gold more attractive as an investment option?

JB: One argument would be that India does have a high level of liquidity in the Gold Market, thanks to the large number of individuals trading gold in the open market. However, from an investment perspective, the development of the exchanges along with the development of more gold-backed investment vehicles such as Gold ETF products would boost the liquidity of the market and add confidence at the retail level. There is also much to be done to better inform the Indian investor on the benefits of investing in gold.


CM:
What would be your advice to investors in gold? And what will be India's role in creating higher demand for gold?


JB:
Gold has attracted investors throughout the centuries, protecting their wealth and providing a 'safe haven' in troubled or uncertain times. This appeal remains compelling for modern investors too. Gold's investment qualities – its portfolio diversification role, its role as a dollar hedge and an inflation hedge and as a risk management tool – remain unchanged. We will work further to communicate these facts to the Indian investor. India has long had a 'love affair' with this unique precious metal. As the WGC continues to promote gold among Indians and as new market opportunities open up, we believe India will continue to lead global demand for gold.


CM:
What is your take on Gold Exchange Traded Funds? What is the growth potential of ETF in the next five years?


JB:
The World Gold Council was instrumental in launching Gold ETFs. The concept has revolutionized investor access to gold. Exchange traded gold provides retail and institutional investors with an efficient and cost-effective way to invest in gold. It aims to overcome the existing barriers to gold as a practical asset and investment product. For many investors, the costs associated with buying and selling the securities are expected to be less than the costs associated with buying, selling, storing and insuring gold bullion in a traditional allocated gold bullion account.

Furthermore, Exchange Traded Gold can be traded as easily as any other security listed on a stock exchange. The Gold ETFs have proved remarkably successful since the first one was launched some five years. In 2006, holdings in these products accounted for 38 percent of world investment demand for gold, and as things stand (at the end of September 2007), there was over 790 tonnes of gold in ETFs worldwide, valued at nearly $19 billion.


CM:
Can you briefly explain the industrial applications of gold, which now account for nearly 500 tonnes a year? How much growth do you see here?

JB: Industrial and dental demand reached a new record of more than 450 tonnes of gold in 2006. It beat the previous record reached in 2000. And in Dollar terms this 2006 record was $8.9 billion. This equates to 13% of total gold demand, slightly more than that for retail investment demand. A good proportion of this industrial demand comes from the electronics sector, where as you may know gold is used for the bonding wire connections inside microchips and as a coating on contacts and connectors.

Now at the World Gold Council, our view is that with manufacturers continuing to look for cheaper alternatives to gold and the dental market likely to slowly decline, the discovery of new industrial uses for gold is important if industrial off take is to remain healthy in the long-term. We've a number of programs aimed at developing new industrial uses, including funding of research and technical feasibility studies. There are some very interesting applications in the field of nanotechnology, including emission control technologies and medical applications, including cancer treatment. All of these exciting new applications have been made possible due to the unique properties that gold possesses. You can find more information on www.utilisegold.com.


CM:
What do you mean when you say you promote responsible, ethical, social and environmental practices in mining?

JB: As the global advocate for gold, the WGC is committed to playing a key role in the development of a truly sustainable Gold Mining industry. We provide a forum for education and dialogue that helps to address the range of sustainability issues faced by the gold mining industry, our membership and society at large. By expanding our membership we facilitate a broader participation by the gold mining industry in addressing these issues.

The World Gold Council is an active member of both the International Council on Mining and Metals (ICMM) and the Council for Responsible Jewelry Practices (CRJP). It fully endorses the principles and mission statement of both organizations with regard to sustainability. The ICMM has committed corporate members to implement the ICMM Sustainable Development Framework, including leading global standards, public reporting, independent assurance and sharing good practice.

The CRJP's objective is to promote responsible, ethical, social and environmental practices throughout the diamond and gold jewelry supply chain, from mine to retail. Both organizations contribute to the Initiative for Responsible Mining Assurance (IRMA), a multi stakeholder group of WGC members, trade partners and non-governmental organizations. It aims to develop a process for the identification of responsible mining standards and a governance model for the assurance system. The WGC fully supports the aims of the IRMA.

It is important to take into account the broader positive economic and social benefits Gold Mining brings to many developing countries.

A WGC report issued in 2005 entitled A Touch of Gold demonstrated how gold has become one of the most important exports for heavily indebted poor countries and illustrated the benefits that gold mining brings to developing countries. The World Gold Council is committed to its advocacy of sustainable development throughout the gold industry, and will continue to support improvements and education regarding the social, environmental, human and ethical aspects of our industry.

CM: Should India increase its gold reserves to further fuel the booming economy? This is one question that the apex Reserve Bank of India is debating these days. What is your take on this?

JB: The Indian Central Bank currently holds 3.4% of its reserves in gold, and this represents 358 tonnes of gold. The international average is about 10.5% at current Gold Market prices but, in the EU it is over 40 percent and the USA holds around 70 percent of its reserves in gold. Countries facing particular volatility in their economic and/or political circumstances will want to consider the level of gold in their reserves.

While it is up to each individual central bank to decide the level of its own Central Bank Gold Reserves, the reasons for holding gold are constant. These include gold's good diversification properties in a currency portfolio, which stem from its value being determined by supply and demand in the world gold markets, as opposed to currencies and government securities, which depend on government promises and variations in central banks' monetary policies. Gold is a unique asset in that it is no one else's liability.

Its status cannot be undermined by inflation in a reserve currency of a country. Gold has also maintained its value in terms of real purchasing power in the long run and is also comparable to a long term insurance premium, against such events as war, an unexpected surge of inflation, a generalized debt crisis involving, a regression to a world of currency and trading blocs, or the international isolation of a country. The public also takes confidence from knowing that its government holds gold – an indestructible asset and one not prone to the inflationary worries overhanging paper money.


CM:
Analysts have predicted that gold consumption in India will rise to 900 tonnes this year. Does that sound good to you? How do you plan to capitalize on this boom?

JB: If the Gold Price volatility that dented jewellery demand so badly through large parts of 2006 does not return, we could indeed see record demand in India in 2007. In fact predictions earlier in the year were that demand could even break through the 1,000 tonne mark, although recent price movements have now made this less likely. The World Gold Council is instrumental in helping to drive this demand in conjunction with its strategic partners in the Indian Gold Market.

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