India's Over-Heated Gold Market

At what price might India's gold-hungry consumers step back in...?

INDIA'S OVER-HEATED Gold Market was headed for a fall on Thursday, even as global Gold Prices picked up, with demand for the yellow metal negligible among dealers and traders in the main trading hubs like Mumbai.

   The spot price of gold in Mumbai hovered around 11,000 rupees per 10 grams. Traders said the Gold Market in India – the largest global consumer of gold – could go up only if the global prices of the yellow metal comes down at least 8 dollars an ounce.

   In global markets, Gold Prices have risen on short-covering but remain nearly 3% down from Monday's all-time high of $914 an ounce. The yellow metal had rallied on hopes of a hefty rate cut to US interest rates at the end of January, a move that would dent the Dollar still further and heighten the appeal of Buying Gold.

   Indian traders said people expected levels closer to the psychological barrier of 11,000 rupees per 10 grams before they would buy, however. "People are asking us when the price will come down, so that they can Buy Gold," said a gold merchant in the southern Indian city of Kochi.

   But many Hindu weddings are likely to be held between now and May, the end of the traditional spring festival season, keeping the Gold Market with "must buy" purchases.

   India is the largest consumer of gold in the world. But Suresh Hundia, president of the Bombay Bullion Association said that gold demand is declining thanks to the current "overheated Gold Prices".

   "The fact is that these days people are booking profits and selling their gold back to jewelers," he said. And as the Gold Price has soared to record highs, imports have come to a near standstill, tumbling 70-80% in the last month.

   Gold imports in the last quarter of 2007 may have been 20% lower than in the same period in 2006.

   India consumes anywhere between 800 to 900 tonnes of gold worth $6-7 billion annually. But domestic production of gold is only about 2 tonnes per annum. India has now set up more than 3,000 offices worldwide for promoting and marketing Indian diamonds. The Indian industry has acquired the leading position in cutting and polishing of rough diamonds.

   The industry is well supported by government policies and the banking sector; around 50 banks provide nearly $3 billion in credit to the Indian diamond industry.

   India already has an active Gold Market on its futures exchanges, and it now has a functioning diamond bourse in Mumbai. 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 consumer market.

   The Indian gems and jewelry sector is largely unorganized, however, 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 greater than $4.15 million (Rs 200 million). There are about 450,000 goldsmiths spread throughout the country.

   Most of the jewelry produced in India today remains hand made. The industry is dominated by family jewelers, who constitute nearly 96% of the market. Organized players such as Tata – with its Tanishq brand – have been growing steadily, 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.