Gold News

India's Gold-Buying Frenzy

India's gold demand may have slowed this Diwali, but the long-term trend is surely higher...

ALL THAT GLISTERS really is gold. That's the message that India, now one-billion strong, is sending out to the world in the 21st century as it witnesses a surge in consumer spending.

   If you have any doubts about India's consumer obsession with gold, just walk into any shopping mall, busy street or market road. The shops most swarmed by customers today are certainly jewelry showrooms.

   An unprecedented consumer spending boom across India means the Gold Market is dazzling in the country and analysts have predicted that gold consumption will rise to a record 900 tonnes this year.

   Kotak Commodity Associate Vice President Si Kannan is very bullish on gold for the coming years, but with a word of caution.

   "For investors I would advise them to keep a check on the dips in the Gold Price," says Kannan. Keeping a day-to-day watch on the market is necessary, he adds, since gold often dips – if only for five minutes – and that could prove a great time to enter the Gold Market and corner your position by buying it.

   Kannan predicts that the next three years will bring gold to US$900 per ounce. The only concern for the Indian market is the rise of the Rupee versus the US Dollar – and that could be a problem for local Gold Prices.

   Monal Thakar of Amrapali Industries, however, feels that Gold Prices should come down locally now the annual festival season has begun.

   "There will be physical demand for gold and there will be lot of supply [from recycled jewelry] but I feel after the festival season is over the prices will rise once again. In the long term, however, I see the gold price around Rs 780-785 per gram [a near 20% drop from current local prices]. India is seeing the highest-ever demand for gold this year."

   The strengthening of the Rupee against the US Dollar and rising consumer spending have increased India's gold demand by as much as 72% in the first half of the year. A report from the World Gold Council says demand for gold in India reached an all-time high of 317 tonnes in the second quarter of 2007. The figures are nearly double what was sold last year – and they are equal to half the global mined output for the same period.

   Of this, only 10-15% was recycled gold, indicating strong demand for fresh imports. Gold traders predict that if the current demand continues, the full-year consumption of gold in India could go up by 30% year-on-year to 900 tonnes.

   Traditionally, gold demand peaks in the country during the second half of the year, during the traditional festive and wedding seasons. This year is no different. People in rural and urban areas have already started stocking up on the yellow metal for festivals like Diwali and Dusshera.

   According to Suresh Hundia, president of the Bombay Bullion Association, traders expect record sales of gold this year. "Many traders and jewelers are working overtime to meet the ever-growing demand for gold," he says. Global metals consultancy GFMS in London agrees, adding that gold purchases in India are booming in the wake of rising jewelry demand, plus the decline of the US Dollar and lower price volatility in the local Gold Market.

   India is the largest consumer of the yellow metal in the world. The country has recently consumed anywhere between 600 to 700 tonnes of gold worth $6-7 billion annually. But domestic production of gold is only about two tonnes per annum. The GFMS consultancy says that net gold de-hedging by global gold mining companies in the second half of 2007 will be between 1.5 million and 2.5 million ounces in total. This is only likely to add to upwards pressure on Gold Prices.

   The Indian gems and jewelry industry is highly competitive in the world market due to its low cost of production and availability of skilled labor. In addition, the industry has a worldwide distribution network, which has been established over a period of time.

   India has set up more than 3,000 offices worldwide for promoting and marketing Indian diamonds. The Indian diamond industry has acquired leadership position in cutting and polishing of rough diamonds. India has the world's largest cutting and polishing industry, employing around 800,000 people (constituting 94% of global workers) with more than 500 hi-tech laser machines.

   The industry is well supported by government policies and the banking sector; around 50 banks provide nearly $3 billion credit to Indian diamond industry. India is expected to have its diamond bourse functioning at Mumbai in 2006. India is therefore a significant player in the world gems and jewelry market both as a source of processed diamonds as well as a large consuming market. But the Indian gems and jewelry sector is largely unorganized as a single industry at present.

   There are over 15,000 players across the country in the gold processing industry, of which only about 80 players have a turnover of over $4.15 million (Rs 200 million). There are about 450,000 goldsmiths.

   India was one of the first countries to start making fine jewelry from minerals and metals, and even today, most of the jewelry produced in India is hand made. The industry is dominated by family jewellers, who constitute nearly 96% of the market. Organized players such as Tata, with its Tanishq brand, have been growing steadily, however, carving a 4% market share.

   As India's jewelry market matures, it is expected to get more organized and the share of family jewelers is expected to decline. Traditional pockets of jewelry manufacturing are:

  • Jewelry crafting by traditional goldsmiths is confined to a few regions in India. These pockets are widely separated and involve craftsmen whose skills have been handed down over generations. Surat is an important diamond processing centre, which exports around 80 per cent of the production and has more than 3,500 diamond processing units.
  • Jaipur is a key centre for polishing precious and semi-precious gemstones.
  • Delhi and its neighbouring states are famous for manufacturing silver jewelry and articles.
  • Kolkata is famous for its lightweight plain gold jewelry. This category of jewelry finds a large market in Tamil Nadu.
  • Hyderabad is the centre for precious and semi-precious studded jewelry.
  • Nellore is a source for hand made jewelry that has been supplying the Chennai market for quite a few decades. Belgaum in Karnataka and Nellore together, specialise in studded jewelry using synthetic or imitation stones.
  • Coimbatore in Tamil Nadu specialises in casting jewelry.
  • Trichur in Kerala is another source for lightweight gold jewelry and diamond cutting.
  • Mumbai is the centre for machine made jewelry. The city is also India's largest wholesale market in terms of volume.

   Joy Alukkas, owner of one of India's leading jewelry companies – the Joy Alukkas Group – says gold is undoubtedly the best commodity to invest in these days.

   "Gold Prices may be going up. But undoubtedly, it is gold that has the global charm for huge investment potential," he said. Quoting from a new survey from New York-based hedge fund Ospraie Management LLC, Alukkas said gold will be among the five best commodity-investment opportunities over the next two years, thanks to the declining production of the yellow metal.

   The hedge fund said that rising costs and lack of investment have limited output in South Africa, the world's largest gold producer, Peru and other countries. "We look at gold as a barometer of wealth in the world," Ospraie said, adding: "The underpinning of demand is very strong."

   In the last few years, growing purchasing power in Asian countries such as India and China has spurred demand for gold, pushing prices up 11% in the past year. Gold production growth exceeded population growth from the 1840s to 1940s. It declined after World War II for almost 50 years, but started up again in 1989.

   But according to the data from the World Gold Council, gold production dropped 3.1% to a 10-year low of 2,471 metric tonnes in 2006. Worldwide gold mine production had fallen by five per cent in 2004, with 2,464 tonnes marking an eight-year low. Experts say rising costs are hindering the exploration by gold producers such as Barrick Gold Corp, the world's largest gold mining company. Newmont Mining Corp, the second biggest producer, said in April first-quarter profit plunged 67% as output slumped and costs rose.

   The Gold Price has now been rising for more than six years. It has gained 158% since 2001. That works out to 26% per annum, which has consistently beaten most other markets. Global commodity companies believe that Gold Prices will rise for years to come, eventually reaching at least $2000 and it will probably go even higher. Investment experts say gold is the best commodity to invest in because it has stood the test of time.

   "Gold has a 5,000-year solid track record. It is a time-tested and valuable commodity. It always has been, and it always will be. So it is the ideal commodity to invest in these days," says Prahlad Patel, a gold investment expert based in Mumbai. According to him, gold is real money and it has maintained its purchasing power over the centuries.

   "As the Dollar continues to slide, and spending and money creation continue on their merry way, gold will be the ultimate beneficiary," he added.

   Experts have also predicted that China will become the largest gold producer in the world by 2010. Between 1997 and 2006 production of gold in China increased by 162.8 tonnes to 247.2 tonnes. While gold production in traditional producing countries such as South Africa has declined over recent years, output from emerging gold producing countries has increased from 17.7% to 29.8% in the last ten years. China's gold production for the first quarter of 2007 was recently recorded at 56.183 tonnes, an increase of 15.99% on the same period last year.

Gold: India-Australia Love Story

   The latest Gold Market reports say India has emerged as the fourth-largest merchandise gold export market for Australia in 2006-07. Gold exports comprise nearly half of all merchandise exports to India from Australia, says a report from the Australia India Business Council (AIBC). It said in 2006-07 India was Australia's largest market for gold, second-largest market for coal and copper ore, and third-largest market for wool.

   Australia has also agreed to allow the export of uranium to India, subject to strict conditions. Australian exports to India rose 37% in 2006-07 as against 22% in 2005-06. Last year, merchandise exports from Australia to India were worth AU$10.1 billion, up AU$2.7 billion.

   According to Australia's trade minister Warren Truss, the booming export of his country to India is largely driven by gold. He said the major commodity movements from Australia to India during 2006-2007 were gold (including gold re-exported after industrial processing) amounting to AU$4.7 billion, up $1.8 billion (63%); copper ores amounting to AU$1.0 billion, up $165 million (19%); and vegetable exports worth AU$150 million, up AU$99 million (191%).

   "The success of Australia's long-term engagement with India will rely heavily on the commercial links built up by Australian businesses," Truss pointed out.

Should India hike its gold reserves?

   Globally, India is ranked sixth in the top-ten list of the world's gold and currency reserves. The first three positions are being held by Japan, Russia and China. China has state currency reserves with over $940 billion, while Japan has $871.9 billion currency reserves. Russia is in the third position with $265.6 billion.

   Taiwan occupies the fourth position with $260.4 billion reserves, while South Korea is placed fifth with $225.7 billion reserves, followed by India with $164 billion and Singapore with $128.7 billion. Hong Kong, Germany and France wrap up the list of ten leaders.

   In the last few years, the foreign exchange reserves in India have risen significantly while gold reserves have remained static. Today, the proportion of gold in forex reserves has come down to a pitiful low of 3.6%. The foreign exchange reserves in India are invested in multi-currency, multi-asset portfolios.

   According to official data, in March 2006, out of the total foreign currency assets of $145.1 billion, $35.2 billion was invested in securities, $65.4 billion was deposited with other central banks — BIS & IMF — and $44.5 billion was in the form of deposits with foreign commercial banks. According to former Reserve Bank of India deputy governor S S Tarapore gold as a reserve asset has a longer and more enduring history than flat money, and thus deserved a better representation in the country's forex reserves. He has argued that it is time India increased the gold reserves in tune with the booming economy.

   But this is not a decision which the government would find easy to take. For instance, if the gold proportion of the forex reserves is raised to 10% of total reserves, it would require a forex outgo to the tune of about $15 billion at current prices. Moreover, if India hikes the gold reserves, it could also affect the bullion market in a big way. But officials in the finance ministry said discussions are on between the Reserve Bank experts and key officers of the Prime Minister's Office to decide whether it is prudent for India to hike the gold reserves.

   In fact, several central banks like in China and Russia are now considering increase in their reserves.

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