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The Role of Gold in India

The Role of Gold in India

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Published by Gabhru Preet Love

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Published by: Gabhru Preet Love on Feb 17, 2011
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India is the world’s largest gold market involume terms, one that has expandedconsiderably during its period of liberali-sation. This report provides a broadoverview of the gold market within thecontext of India’s new super-chargedeconomy. It looks at all the major aspectsof demand and supply, including how the jewellery sector is being affected by thecurrent social and economic changes,new ways to invest in gold, the role of the Reserve Bank of India and on thesupply-side, mine production and thescrap market.
Market size: A league of its own
India is the world’s largest consumer of gold in tonnage terms. In 2005, Indiaaccounted for 22% of global gold jewellery demand and 35% of all net retailinvestment (coins and bars). Golddemand has grown at an average annualrate of 10% since the repeal of the GoldControl Act in 1990, which had forbiddenthe holding of gold in bar form
. Althoughestimates vary, India is now thought tohold close to 15,000 tonnes or 10% of theworld’s entire above-ground gold stocks.Sales have averaged 676 tonnes perannum over the past decade, which isone and a half times more than in theUnited States, the world’s second largestgold market in volume terms (it is thelargest in value terms), and betweenthree and eight times more than in China,Turkey, Saudi Arabia and the United ArabEmirates, the world’s other main gold-consuming countries (Figure 1). Thestrength of demand over the past decadeis especially impressive when juxtaposedagainst the price, which has risen almostcontinuously in rupee terms over thesame period (Figure 2). Likewise in 2005,despite a 6% rise in the gold price inrupee terms, gold consumption rose to750 tonnes from 639 tonnes the previousyear, with growth in each category (jew-ellery, coins and bars, medallions andimitation coins, electronics and otherindustrial and decorative uses).
The Role of Gold in India
By Natalie Dempster, Investment Research Manager, World Gold Council
For a full discussion on the de-regulation of the Indian gold market see:
Deregulation of Gold in India
. Himadri Bhattacharya, World Gold Council, March 2003.
Figure 1: Annual Demand
 for Gold (tonnes) 10 year average, 1996-2005
0100200300400500600700800IndiaUnited StatesChinaTurkeySaudi ArabiaUAE
Source: GFMS Ltd.
Jewellery, coins and bars, medallions and imitation coins, industrial and decorartive uses
The origins of gold demand
Indian gold demand is firmly embeddedin cultural and religious traditions. Thecountry has one of the most deeply reli-gious societies in the world, the mostwidespread faith being Hinduism, whichis practiced by around 80% of the popu-lation. Gold is seen as a symbol of wealthand prosperity in the Hindu religion. Thegoddess Lakshmi, who symbolises fertil-ity, productiveness and prosperity, is saidto have been bathed by elephants whocarried pure water in golden vessels. Sheis depicted as a beautiful woman of gold-en complexion, dressed in gold-embroi-dered red clothes, with gold coinsflowing from her hands. Since it is sug-gested that those who worship her gainwealth, Hindus consider gold an auspi-cious metal, which they like to buy or giftduring religious festivals. The mostimportant of these is Diwali, which marksthe beginning of the Hindu New Year andusually takes place in October orNovember. Akshaya Thrithiya, falling in April or May,has also become an important day tobuy gold. Purchases on this day areconsidered auspicious (it is the thirdmost auspicious day in the Hindu calen-dar). The association between gold and“auspiciousness” has been used inrecent years to promote the idea of buy-ing gold. Over the past five years, Akshaya Thrithiya has become a majorgold-buying occasion in the South of India, especially in the State of TamilNadu, where sales have reached recordlevels. Since 2005, the idea has beenpromoted across the North and West of the country, which has also resulted in asignificant rise in gold sales in theseregions.Gold also plays an important role in themarriage ceremony, where brides areoften adorned from head to toe in gold jewellery. Most of this will be a gift fromher parents as a way of giving her someinheritance, as Hindu tradition dictatesthat the family’s assets are only passeddown to sons. The gold (and other gifts)the bride receives or her “Streedhan”(“
” meaning woman and “
meaning wealth) mean her parents canmake sure she is financially secure andenjoys at least the same standard of liv-ing to which she was accustomed in herchildhood. Gold is especially important inthis respect as it remains directly underher control, whereas she may not beprivy to the family’s other financial affairs.With an estimated 10 million marriages ayear taking place in India, wedding-relat-ed demand is big business. Much of thisdemand takes place in the wedding sea-son, which falls between October andJanuary, and April and May, though agood many purchases will be made wellin advance of the wedding. Indeed, it iscustomary for the parents of a baby girlto start accumulating gold for this pur-pose soon after the child is born.Not all gold demand is allied with cultur-al and religious beliefs. Gold is alsoviewed as a secure and easily accessiblesavings vehicle by the rural community,where around 70% of the populationlives. Gold has the added virtue of beingan inflation hedge. An investor who hadbought gold in 1970, for example, wouldhave been more than protected againstinflation (Figure 3). Gold is also one of the limited ways in which Indian investorscan diversify their currency exposure.This is because the Rupee is not yet fully
Figure 2: Indian Gold Demand
 (tonnes) and Price (Rupee)
01002003004005006007008009001991199219931994199519961997199819992000200120022003200420050500010000150002000025000Tonnes LHSPrice (Rupee) RHS
Source: GFMS Ltd., Global Insight 
Jewellery, coins and bars, medallions and imitation coins, industrial and decorartive uses
convertible – Indians are only allowed tohold financial assets in Rupees – where-as they have been allowed to hold goldsince 1990 when the Gold Control Actwas repealed.
Recent economic trends
The Indian economy has enjoyed rapidgrowth over the past decade, thanks tothe progressive liberalisation of itseconomy and the consequent inflow of foreign direct investment, which hasallowed the economy to start reaping thebenefits of globalisation on a truly mas-sive scale. India is now the fifth largesteconomy in the world (on a PPP basis)having posted average annual growthrate of 6% p.a for the past decade (Figure4). The economy shows no signs of slow-ing either. A noticeable feature of India’sdevelopment has been the strength of itsdomestic economy relative to mostemerging markets in Asia. This is partic-ularly true of consumer spending, whichhas accounted for the lion’s share of growth over the past decade. Thecountry’s $200 billion retail industry ischanging, with the emergence of newlarge-scale retailing. Shopping centresare starting to spring up across urbanIndia, something which is changing theface of retailing and will affect traditionalgold retailers. KPMG and the Federationof Indian Chambers of Commerce andIndustry estimate that the amount of shopping centre space will have risen to90 million square feet by the end of 2007,more than four times the 22 millionsquare feet estimated in 2005
Gold Demand Trendsand Outlook
The past decade can be split into twodistinct periods as far as the value of goldsales is concerned: 1996-2001, whensales were broadly stable in value terms,and 2002-2005, when sales acceleratedstrongly (Figure 5). During the first period,spending averaged Rs. 284 billion perannum and fluctuated in a relatively nar-row range of Rs. 224-316 billion a year.Spending was especially strong in 1998thanks to the release of pent up demandfollowing the removal of import controlsin November 1997. Gold sales werebroadly stable in the three years that fol-lowed, held back by relatively weakincome growth. Sales in tonnage weremore volatile over the period, averaging709 tonnes and fluctuating between506-810 tonnes. The higher variability of 
as oppose to
spending is afunction of both the retail price settingmechanism in Indian, as well as theorigins of demand. The price of jewellerychanges in line with changes in the inter-national market price in India, with each
Indian retail: on the fast track,
KPMG, Federation of Indian Chambers of Commerce and Industry, December 2005.
Figure 3: Indian CPI and Gold in Rupee (re-based January 1971 = 100)
0200040006000800010000Jan-70Jan-73Jan-76Jan-79Jan-82Jan-85Jan-88Jan-91Jan-94Jan-97Jan-00Jan-03Jan-06CPIGold in Rupee
Source: Global Insight 
Figure 4: GDP growth (% yoy)
Source: Global Insight 

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