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08/22/2009 3:35:54 PM (NORMAL )

THE INDIAN GOLD CONSUMER

Pent up demand for gold in India could soon be unleashed

The current environment may be heralding a change in investment and jewellery purchase mentality and anecdotal evidence points to points to a pool of "readily-available funds that could be directed towards purchases of gold jewellery

Author: Rhona O'Connell
Posted: Thursday , 20 Aug 2009

LONDON -

Within its latest Gold Demand Trends publication, the World Gold Council looks in some detail at individual consuming nations and suggests that there is considerable potential for Indian gold demand to rise dramatically. India has traditionally been the world's largest consumer of gold, consistently accounting for just over 22% of world jewellery and investment demand.

At least it did until the start of 2009. India was a net dishoarder of investment bars in the first quarter of this year and the country's combined jewellery and investment demand absorbed just 4% of the world total of just 480 tonnes (compared with a global quarterly average of 752 tonnes for 2000 to 2008). The performance in the second quarter was better, with a return to net investment of small bars and with jewellery demand more than doubling. Even so, jewellery offtake in India in the second quarter of this year was down by 56% against Q2 2008 at just 88 tonnes and first half demand was only 122 tonnes, compared with a first half average from 2000 - 2008 of almost 288 tonnes.

The muffling of Indian demand in the first quarter was ascribed to a "perfect storm" of events that resulted in the lowest quarterly gold jewellery offtake in at least 20 years, as well as turning net investment into net disinvestment. Gold jewellery was hit by record local prices and the deterioration in both the domestic and the global economic environment, which also gave rise to increasing unemployment among expatriates, who were returning home to India. Jewellery recycling soared as the rupee price rose, eventually posting a record of Rp15,780 per 10 grammes (24th February) as investors cashed in their jewellery both to take advantage of high prices and to mitigate distressed economic circumstances. Outright demand for jewellery did not die away; some consumers exchanged jewellery for new pieces, while others brought pieces back for melting down and re-making, or the exchange of old jewellery for newer items of lower value, with the balance in cash.

The state of the jewellery market impinged on retail investment, and as local prices moved to a discount to the international market, so wholesalers became exporters of gold (partly also as they ran down inventory as well as passing through material that had come back from consumers), throwing the Indian investment market into negative territory for the first time.

Against this backdrop the second quarter staged a turn-around of 92 tonnes as investment returned to positive territory (21 tonnes) and jewellery rose from 34 tonnes to 88 tonnes. The local gold price held broadly steady at close to record levels, fluctuating between Rp14,000/10g and Rp15,100/10g. This price action deterred consumers for two reasons; a) absolute high levels and their effect on "affordability", and b) the sideways trend dulled expectations of a future recovery in price, which is one of the key drivers behind price-elastic regional gold purchases. WGC suggests that both consumers and wholesalers appeared to be holding back in anticipation of "more sizeable dips" to enhance buying opportunities.

The current environment may be heralding a change in investment and jewellery purchase mentality. Historically, would-be buyers of gold in price-responsive countries have returned to the market when price volatility has faded away and the price has stabilised - even if at a higher level than previously. This time, as a result of record high prices and the weak economic backdrop, consumers and investors "have been hesitant" to return to the market.

The Council notes that data to the end of June-2009 show that bank deposits in India grew by 22% year-on-year as consumers have preferred the safety of cash in the face of poor economic activity and volatile gold prices, and suggests that this, coupled with local anecdotal evidence, points to a pool of "readily-available funds that could be directed towards purchases of gold jewellery should prices weaken".

The price point identified is Rp14,000/10g, which at current exchange rates would be a shade below $900/ounce.

This, of course, is theoretical ("could be directed towards gold") and the Rp14,000 level could also become a moving target, especially if the monsoon season, which has not been a good one, has a marked effect on this year's income in the agricultural sector, which accounts for approximately 18% of GDP. For the time being the market remains sluggish; the build-up to major Hindu Festivals, culminating in the first instance with Diwali in mid-October, will be a key to the prospects for the market.