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Au-Struck Masses

Nothing’s glittered better than gold for the Indian investor. It may not last forever, but s/he’s still buying into gold.

Au-Struck Masses
Amit Haralka
Au-Struck Masses
outlookindia.com
-0001-11-30T00:00:00+0553

Craze: The Many Ways You Can Consume Gold

  • Jewellery in the form of 22 carat, 18 carat, alloy mixed, studded with stones or combined with other precious metals like silver, platinum as well as stones
  • Coins
  • Bars
  • Biscuits from banks/traders
  • Gold-leafed gifts, furniture; solid gold bric-a-bracs
  • Gold savings schemes to put aside money for a period of time and then convert to jewellery
  • Loans against gold as a collateral
  • Jewellers are selling gold leaf, petals to lower income people.
  • Microfinance schemes are bundling gold with loans.
  • Financial instruments like ETFs, gold funds, e-gold and so on.

Gold Advertising Growth

  • 55% TV
  • 31% Print

Jan-Sep 2011, compared to the corresponding period in 2010 Source: TAM

***

It happened once upon a time in Mumbai, last Sunday (October 23). Having strangled England with his banana swingers all season, Praveen Kumar rolled in to bowl yet another over in the revenge series, at the Wankhede. A boundary was followed by a wide down the leg side. Next ball, horror—another wide, this time even wider than the previous one. Skipper Dhoni lay behind the stumps, mystified at the Miser from Meerut uncharacteristically squandering away sundries.

After pondering for a while at the wicket, hands on knees, Kumar proceeded to return to his bowling mark. And, as he passed the non-striker’s end, the bowler suddenly seemed to realise the cause of his temporary strife. Nonchalantly, he put his hand inside his shirt, pulled out a gold chain thick enough to strangulate a 400-pound bear, handed it to the umpire at the bowler’s end, and returned to discover his line and length.

So what? Maybe your bowling hero is Shantakumaran Sreesanth. But that action, in the full glare of cameras, captured India’s magnificent obsession with the yellow metal that now cheerfully afflicts everybody: from city-slickers to the small-towners; from women to men to medium-pacers. And, unlike in the past, when gold was what you stashed away secretly in safe deposit lockers, away from evil eyes, now you flaunt it, if you can afford it.

In a largely uncertain world, with money chasing gold’s enviable performance as an investment, everyone seems to want a piece of the pie. And if that also captures a desire rooted in history and tradition, so much the better. India’s craze for the yellow metal appears unabated despite gold prices shooting up to Rs 29,000 per 10 gm from Rs 21,000 per 10 gm in June this year. Even a correction to Rs 26,000 or thereabouts has not brought out the sceptics. Just you wait, gold will rise again, the experts proclaim. The question is, how long can naked demand continue to fuel this relentless rise in gold prices? Will it last forever?


“There’s nothing to strip the demand for gold in urban areas. In rural areas, money from land sale is generally invested in precious metals.” Mahesh Vyas, Centre for Monitoring Indian Economy “When the prices were moving upwards last year, Indians did not seem price-conscious. Inflation across products since August has led to a lull.” Ajay Mitra, World Gold Council

“Do we know exactly what determines the price of gold or what affects it? Without a clear understanding, how can one invest?” Parag Parikh, PPFAS “Gold should be treated as an opportunistic investment. It is not an essential part of an investment portfolio.” Dhirendra Kumar,
ValueResearch

“If the world economies stabilise, there may be a slight price correction, but it won’t change the value investors and customers ascribe to gold.” Nitin Rao, HDFC Bank “Buying jewellery in various forms no longer conforms to old traditions of prestige and saving for a rainy day, it’s also a lifestyle statement.” Vibha Desai, Brand consultant

“The trend of gradually buying into gold through the exchange traded funds route is slowly catching on with middle-class retail investors too.” Vineet Arora, ICICI Securities “Gold as an investment is growing at a rapid rate with the younger urban population that wants to hedge risks and invest in other instruments.” Devendra Nvegi, Delta Global Partners

These are not easy questions to answer. Numerous experts have been wrong before. In 2009, when the metal touched the Rs 16,000 mark, analysts said that prices were unlikely to go much beyond that level. Even Outlook stuck its neck out, forecasting that prices were likely to reach approximately Rs 21,700 in five years’ time—gold crossed that mark in two years flat. Even now, given galloping inflation and rising interest rates, Indians are continuing to buy the metal—the approaching wedding season is a factor, no doubt—albeit with less gusto than before.

The truth is, despite all that faith in gold, Indian consumers—or counterparts elsewhere in the world—don’t really determine gold prices. Global debt crises, the state of various economies across the world, prices of crude oil, the movement of the dollar, coupled with central banks rushing to shore up reserves have led to the surge in gold prices. “The unique role of gold as the ultimate hard currency and preserver of wealth has come into focus,” says Ajay Mitra, managing director (Middle East & India), World Gold Council. Instead of being net sellers of gold, central banks have been its net buyers in the last year or so.

A key reason, then, is the disenchantment with other investments corroded by inflation. Real estate, some argue, is the true gold in India. They are right. But it’s getting prohibitively expensive for most. As Mahesh Vyas, CEO of the Centre for Monitoring Indian Economy, argues, higher incomes have led to a surge in urban consumer demand for gold despite the sharp price rise. And in rural areas, any windfall gains—particularly from the sale of land—sees investments in the precious metal go up “since the equity market and other financial instruments do not hold much charm for rural folks”. A large chunk of gold consumption in India comes from rural India.

The current price levels have forced “innovations”—and ceaseless, in-your-face advertising—in the marketplace. This is happening both in financial instruments as well as gold retail. HDFC Bank’s Abheek Barua admits that where Indian investors are concerned, 45 per cent of financial savings are held in unproductive gold assets and that there is a growing push by banks and non-banking finance companies “to create all sorts of products (particularly in small towns and rural areas) like loans against gold as collateral to convert them into productive assets”. That explains why the loans-against-gold business is thriving.

With 70-75 per cent of sales of gold still coming from jewellery, gold retailers are bending over backwards to accommodate customers, offering discounts wherever they can—on manufacturing charges; savings schemes that convert money into actual gold; gold in more accessible form, like gold leaf and petal, and so on. Leading branded jewellery players have upped their ad spends by 30-40 per cent over last season this year. Says Anvar Alikhan, senior VP at JWT, “What we’re seeing, essentially, is that advertisers/marketers are repositioning gold, to make it more relevant to today’s young, affluent consumer, and his/her lifestyle.”

And customers are lapping it up. “Earlier families came with their savings to buy gold because it was needed and auspicious. Now with disposable and double incomes, people buy gold all year round,” says Ruhee Nanda, who runs a jewellery store under her own name at Gurgaon’s Gold Souk.

Aesthetics is definitely driving the jewellery market, as well as the marketing noise around it. “Buying jewellery in its various forms no longer conforms to old traditions of prestige and saving for a rainy day, it is also a lifestyle statement,” says Vibha Desai, a Delhi-based brand consultant.

Interestingly, when it comes to the final consumption in the form of ornaments or gifts, price has no bearing on the buying decision. Despite being price-sensitive as far as demand for gold as an investment goes, retail investors are willing to ignore the volatility of the gold market to be part of the band that’s made a killing on the gold market in the last three years. “There is a tendency to follow the herd, albeit with a lag factor because one doesn’t know how prices will move,” says a Mumbai-based commodity broker.

There is a gradual attitudinal shift towards treating gold as an investment across age and income classes. Take Suriyakumari Anandan, a Chennai-based retired state government employee, 61, who no longer uses her savings to buy gold. Instead, she gifts her grand-daughters gold coins that can later be exchanged for jewellery. Bullion traders in Mumbai’s Zaveri Bazaar, like Mukesh Kothari of Riddhi Siddhi Bullion, say there has been a 32 to 35 per cent increase in the demand for gold and silver coins and bars. “Since gold has become more expensive, people are looking at it as an investment. Jewellery means some wastage as well as making charges,” he says.

In another example, a group of 15 salaried friends in Mumbai has come together to collectively and systematically save funds on a monthly basis to invest in gold exchange-traded funds. Assets under management for gold ETFs have gone up 10 times over the last three years. “Demand for gold bullion and gold-related investments is a recent phenomenon and probably has a lot to do with the performance of other asset classes,” avers Devendra Nevgi of Delta Global Partners.

For every financial planner who suggests that gold should become part of an investment portfolio, there is another who will disagree. “Gold is not an easy instrument to understand,” says Parag Parikh of PPFAS. “Today do we know exactly what determines the price of gold or what affects it? Without a clear understanding, how can one invest?” Agrees Dhirendra Kumar of ValueResearch, “I would say gold should be treated as an opportunistic investment. Given the rise of instruments globally where ownership of gold is in paper form, there is bound to be speculation.”

Talking about speculation, consider gold’s poor cousin—silver. It has gained attention because several people have made a killing on the market (prices have gone up from Rs 17,000 to Rs 53,000 over the last three years). “We don’t recommend silver as an investment avenue for retail clients because it is even more volatile than gold,” avers Vineet Arora of ICICI Securities. Volatile or not, fact is returns on silver have surpassed even those from gold over the past three years.

So, it is extremely difficult to predict the price of gold by the end of this fiscal. For now, investors and consumers expect the metal to hold its own and at least rise steadily. Though there may be slight corrections depending on how global events pan out, by and large prices are not expected to fall drastically.

Expect blips in demand, though. Says Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities, “Gold prices have risen so much that consumers are shying away, and rightly so. Those who are buying are doing so just for formality’s sake, by purchasing gold coins.” The current price dip, coinciding with the festive and wedding season, has given traders and retailers some hope that it’ll end on a positive note. “When prices are constantly fluctuating, we see that consumers shy away from gold jewellery. But when the prices stabilise, they come back and start buying again,” says Joy Alukkas, chairman of leading jewellery chain Joyalukkas.

So how long will India’s love for gold last? That’s an easy one: probably for a long time to come. As Kanupriya Shah, a Mumbai-based IT consultant, who buys gold fairly regularly, puts it, “At least it’s a tangible asset. I can sell it anywhere in the world and have security. Which other instrument offers me that kind of guarantee?” But remember, commodities are fickle friends. For now, though, the shine on gold is here to stay, for a while longer.


By Arti Sharma with Lola Nayar and Pragya Singh in Delhi, Smita Mitra in Mumbai, Pushpa Iyengar in Chennai and K. Raveendran in Dubai

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