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Home > Business > Business Headline > Commodities

Gold special: Yellow fever grips India

Nandita Jain/Commodity Online | November 13, 2007 17:08 IST
Last Updated: November 13, 2007 17:17 IST

In India, all that glisters is gold. That is the 21st century message the one-billion strong India, witnessing a surge in consumer spending, is sending out to the world. If you have any doubt about Indian consumer's obsession with gold, just walk into any shopping mall, busy streets and market roads across Indian cities and towns. The shops which are swarmed by customers are certainly jewellery showrooms these days.

An unprecedented consumer spending boom across India is making the yellow metal glitter. Yes, 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 in coming years but with a word of caution. "For investors I would advise them to keep a check on the dips in gold price," he says. A day to day watch, he adds, is necessary since many times gold dips barely for five minutes and that should be a great time to be in market and corner your position by buying it. Kannan predicts that next three years will bring gold to $ 900 per ounce. The only concern for the Indian market is the rise of rupee vis-�-vis dollar and that could be a problem for gold prices.

Monal Thakar of Amrapali Industries [Get Quote], however feels, that the gold prices should come down for recovery because the festival season has started. "There will be physical demand for gold and there will be lot of supply but I feel after the festival season is over the prices will rise once again. In long term, however, I see the gold price will be around Rs 780-785 per gram. India is seeing the highest-ever demand for gold this year.

The strengthening of rupee against US dollar and rising consumer spending have raised India's gold demand by as much as 72 per cent 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 of what was sold last year and equal to half the global mined output for the same period. Of this, only 10-15 per cent was recycled gold, indicating strong demand for fresh imports.

Traders predict that if the current demand continues, the full-year consumption of gold in India could go up by 30 per cent on year to 900 tonnes. Traditionally, gold demand peaks in the country during the second half during festivals and wedding season. This year is also not different. People in rural and urban areas have already started stocking up the yellow metal for festivals like Diwali and Dusshera.

According to Suresh Hundia, president of Bombay Bullion Association, traders expect record sales of gold this year. "Many traders and jewellers are working overtime to meet the ever-growing demand for gold," he said. Global metals consultancy GFMS said gold purchases in India are booming in the wake of rising jewellery demand, thanks to the decline of US dollar and lower price volatility for gold. India is the largest consumer of the yellow metal in the world.

The country consumes anywhere between 600 to 700 tonnes of gold worth $6-7 billion annually. But domestic production of gold is only about 2 tonnes per annum. The consultancy said the net gold de-hedging in the second half of 2007 will be between 1.5 million and 2.5 million oz globally. And, who usurps all this gold in India. Mainly the gems and jewellery industry, which is competitive in the world market due to its low cost of production and availability of skilled labour. 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 promotion and marketing of 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 per cent 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 US $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 jewellery market both as a source of processed diamonds as well as a large consuming market. The Indian gems and jewellery sector is largely unorganised 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 US $4.15 million (Rs 200 million). There are about 450,000 goldsmiths spread throughout the country.

India was one of the first countries to start making fine jewellery from minerals and metals and even today, most of the jewellery made in India is hand made. The industry is dominated by family jewellers, who constitute nearly 96 per cent of the market. Organised players such as Tata with its Tanishq brand, have, however, been growing steadily carving a 4 per cent market share. As India's jewellery market matures, it is expected to get more organised and the share of family jewellers is expected to decline. Traditional pockets of jewellery manufacturing are:

  • Jewellery 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 jewellery and articles.
  • Kolkata is famous for its lightweight plain gold jewelry. This category of jewellery finds a large market in Tamil Nadu.
  • Hyderabad is the centre for precious and semi-precious studded jewellery.
  • Nellore is a source for hand made jewellery that has been supplying the Chennai market for quite a few decades. Belgaum in Karnataka and Nellore together, specialise in studded jewellery using synthetic or imitation stones.
  • Coimbatore in Tamil Nadu specialises in casting jewellery.
  • Trichur in Kerala is another source for lightweight gold jewellery and diamond cutting.
  • Mumbai is the centre for machine made jewellery. The city is also India's largest wholesale market in terms of volume.
  • Joy Alukkas, owner of one of India's leading jewellery 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 price of gold has been rising for over six years. It gained 158% since then. That works out to 26% per annum, which has consistently been better than 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 per cent to 29.8 per cent 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 per cent on the same period last year.

    India-Australia Gold Love Story

    Latest 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. 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 per cent in 2006-07 as against 22 per cent 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 per cent); copper ores amounting to AU$1.0 billion, up $165 million (19 per cent); and vegetable exports worth AU$150 million, up AU$99 million (191 per cent). "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?

    Should India increase its gold reserves to further fuel the booming economy? This is one question that the Reserve Bank of India [Get Quote] is debating these days. Globally, India is ranked sixth in the top-ten list of the 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.

    These days, speculation is rife on whether India should hike the proportion of gold in the country's foreign exchange reserves. 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 per cent. 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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