Sunday, June 26, 2011

Why India Loves Gold Bullion ?

The love of gold in India goes far beyond a simple source of future profits. It is an expression of wealth, financial security and family stability. It also carries religious overtones.

Gold remains the wealth of the wife – men only inheriting assets. It represents her and her family's financial security. It is difficult to make a distinction between investment and jewelry demand because in India, these two ideas are inseparable. Gold jewelry is usually 24-carat.

Indian households hold 18,000 tonnes of Gold Bullion. Indian gold demand has grown 25% despite a 400% Rupee price rise in the last decade. Gold demand is strong and is expected to increase 30% by 2020 – by which time cumulative annual demand for gold in India should increase to in excess of 1,200 tonnes or approximately Rs. 2.5 trillion, at current price levels.

India's rapid growth, which will have significant impact on income and savings, will lead to more gold being purchased by almost 3% per annum over the next decade. Indian growth is expected to be around 10% GDP in the next decade, which will feed through into gold demand/savings.

Because gold is more than just money, its price is irrelevant in light of its demand. This demand is limited by an individual's access to money to purchase it. Indian demand for gold will be driven (like in the last decade) by savings and real income levels, not by price. In local currency terms, Indian jewelry demand more than doubled in 2010 to Rs.1,342 billion compared to Rs. 669 billion in 2009.

Indians are savers and save a steady 30% of GDP per annum. Of these savings, 45% is stored in what the developed world considers the usual avenues of savings, while 7% goes into Gold Bullion.

That's right, seven percent of India's $265 billion in total household savings is held in gold. These habits will not likely change.

Likewise, gold will continue to be purchased in the future Indian wedding seasons. It is all part of the social fabric of India. A wedding is the social highlight of the nation and can last for days. 50% of the population is under 25, and there will be 15 million weddings per annum over the next decade. At present Gold Prices and exchange rates, this will drive around 500 tonnes per annum with a further 500 tonnes of existing gold being gifted by one family to the next, which is not recorded in recycling.

The rural agricultural sector, which accounts for 70% of the population, has been the source of 2/3 of gold demand. This brought a sense of seasonality to the gold markets…

Indian gold buying starts its year there in mid-to-late August and carries on through until May of the next year. At the beginning of June, farmers must ensure crops are in the ground and ready for the annual monsoons, or tropical rains. Harvesting takes place through August, which is when the farmers get their annual paycheck.

At the end of May, there is a drop in demand, picking up again in the middle of August. Rural demand for gold is set to grow at 5% per annum, meaning jewelry buying is expected to grow faster than when growth was only 1% per annum.

India is now experiencing the rapid growth of the Middle class and urbanization. This movement has quickened its pace in the last ten years to the extent that the U.N. believes that 41% of India's total population will be living in towns and cities by 2030 — up from the current level of 30%. More importantly, a good proportion of these will join the middle classes.

Mckinsey reports that in 2010 there were 40 million consuming households in India with an annual income of more than US$7,000. This figure is set to more than double to 94 million by 2020. The impact will be significant for gold, which will lose its seasonality and become a feature all year round – though the peak period for gold demand will continue to be from end-August through to end May, as the rural sector joins the new middle classes in buying gold and boosting demand to record highs.

Consider the belief that 'gold brings good fortune'. The performance of gold over the last decade appears to have highlighted that belief in a remarkable way.

In 2000, the Gold Price was just under $300 per ounce. It is now around $1500. Imagine you are the mother of the bride and look at your gold holdings and at today's value. Wouldn't you feel this had served your family well and must surely serve your daughters family as well? This belief will continue for generations to come and Indian demand will continue growing.

Tracking equity markets and the path of other investments alongside gold over the same period confirmed the wisdom of gold investing. Indian gold investors are far more advanced than their developed world counterparts who have not yet appreciated gold's value to the same extent.

The Indian Reserve Bank purchased 200 tonnes of Gold Bullion from the IMF in 2009, reinforcing the perception among Indian investors that gold is reliable and safe as a monetary asset. Skeptical husbands saw their wives stare at them with eyebrows raised when the announcement was made.

India joined the growing ranks of central banks recently Buying Gold as an important reserves asset. With central bank demand growing alongside retail emerging market demand, there is little likelihood of the Gold Price falling back (as if this were merely a 'bull market').

Now add to this the slow but abrasive breakdown of the developed world's currencies. You will see a surge of developed world investors running to gold and silver, to find that there will be too little supply to satisfy the world's demand.

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Julian D.W. Phillips, 24 Jun '11

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