Demand for gold in India rose by 94% to 365 tonnes in H1 2010 compared to 188.4 tonnes in H1 2009, clearly indicating that there has been a rebound in demand. India’s gold demand grew from Rs 27,300 crore to Rs. 60,500 crore, an increase of 122%.

In an interview with Moneycontrol.com's Nasrin Sultana, Ajay Mitra, Managing Director (Middle East and India), World Gold Council (WGC) said that30% of total demand for gold came from investment at a global level in 2008.

Gold appetite to pick up as people adjust to new price: WTC

“Investment demand for gold reached record highs in many segments.At the end of the third quarter of 2009, total identifiable investment in gold had increased by 69% compared with the previous year,” added Mitra.

However according to him, high gold prices will not dampen people’s sentiments in buying the yellow metal.

On an optimistic note he said, “Indian consumers take some time to adjust to a new level of prices but once there is relative stability as you could see in Q1 2010, consumptions starts again. Also, higher prices over a period of time validate their belief in gold as a time-tested asset class.”

Here is a verbatim transcript of his comments.

As per your report, volume in gold in investment has grown 300% compared to 94% in jewellery (YoY) in Jan-June period, 2010. What is the reason for rising interest in investment? Are investors turning more to investing in gold than in equity market? Are people opting safety to risk?

We have seen a real shift in investors’ views towards gold. Institutional and retail investors arelooking to mitigate risk and diversify their portfolio to protect against volatile financial markets are increasingly recognizing gold’s unique investment attributes as a long term strategic asset.

In 2008, 30% of total demand for gold came from investment.Investment demand for gold reached record highs in many segments.At the end of the third quarter of 2009, total identifiable investment in gold had increased by 69% compared with the previous year.

Given gold’s uniqueness, there is no one commodity or asset class that could replace it.The relationship between gold and other commodities is not as close as one might think.Commodity consumption is heavily linked to industrial usage, meaning that commodities tend to fare badly in uncertain economic times when industrial demand and consumer confidence are eroded.

Unlike most other commodities, the geographical and sectoral diversity of gold demand (across jewellery, industrial and investment) has helped insulate the precious metal from western economic cycles. This diversity of demand is at the root of gold’s unique investment attributes; as a diversifier of portfolio risk and a hedge against other corrosive macro economic factors such as inflation.

Moreover, investment sentiments in gold has always been strong especially in our country since consumer and investors recognize it as a time-tested safe asset class and currently it is one of the best performing asset classes. At a global level also, since the 2008 economic turmoil, investor confidence in gold as an asset class has increased to a great extent and it continues to do so.

Do you see this trend changing in the second half of 2010?

The second half is a festive and a wedding season in India. As people tend to buy more jewellery for these occasions there will be a rise in jewellery demand compared to the first half of the year.

In the first half of the year, there was a demand for jewellery during Akshaya Tritiya and the same will soon be seen with the onset of the festive season.

Considering that spot gold touched USD 1,243.30 on Thursday (highest since early July) do you think demand of gold is likely to get hampered? Do you see this as a dampener in festival season?

India is one of the key gold markets which plays a central role in the ongoing growth in gold demand. Historically, India has been the world’s largest gold market in volume terms. Around 18,000 tonnes of gold sit in the hands of private Indian consumers.The strength of demand over the past decade is especially impressive when juxtaposed against the price, which has risen almost continuously in rupee terms over the same period.

In India, gold is consumed for cultural reasons (weddings/ festive occasions) and time-tested belief of Indian housewives to systematically invest in the yellow metal over a period of time. Both these phenomenon are here to stay. Indian consumers take some time to adjust to a new level of prices but once there is relative stability as you could see in Q1 2010, consumptions starts again. Also, higher prices over a period of time validate their belief in gold as a time-tested asset class.

Following on from a very weak beginning to 2009, the India market enjoyed a solid recovery over the remainder of 2009 and Q1 and Q2- 2010, both in the jewellery and net retail investment sectors.

Is supply of gold enough in India to meet the growing appetite in India during this festival season?

The time-tested fundamentals of gold, like any other commodity, are a function of supply and demand. Supply of gold to India has never been a constraint. While there is some amount of gold that is recycled, most of it is imported every year.

How is demand of gold in Asia placed in contrast to demand in Europe and US?

Continued economic uncertainty, particularly surrounding Eurozone sovereign debt, is resulting in an ongoing search for less volatile and more diversified investments such as gold, which is likely to underpin demand for investment in the immediate future.

Further support on the demand side of the gold market is expected in coming months, as the gold price has experienced a pullback since the end of the second quarter due to short term profit taking and a seasonally weak period for gold jewellery. Speculative positions have also turned neutral and the third quarter tends to be a seasonally strong period for gold jewellery.

Recent developments in China are also likely to have positive longer-term implications for this increasingly important market. The PBoC, together with five other ministries/regulators published a proposal to improve the development of the domestic gold market. This further supports the view that there is huge potential for gold ownership to increase among Chinese consumers, in a market with historically tight domestic supply, as discussed in our China Gold Report - Year of the Tiger, March 2010.

In addition, electronics demand is exhibiting signs of further recovery especially in the US and Japan, driving global gold demand for industrial and dental applications up 14% YoY in Q2 2010. The WGC believes demand from this sector may revert back to its historical levels in response to the growing global economic recovery.

Overall in Asia, where do you see demand in gold coming from? Is it from India?

India, China and Saudi Arabia are the key markets where there is robust demand for gold while Turkey and Dubai are the new emerging markets.

According to your report, at the end of July, demand for the ETFs increased by 253 tonnes since the beginning of the year (of which 90% occurred in May and June). Why was there a rise in interest in May and June? Are investors preferring ETFs to equity markets?

The past couple of years have witnessed an extraordinary increase in retail demand for physical gold products. European demand for gold bars and coins in 2008 was close to 243 tonnes and in 2009 rose to 293 tonnes.

In previous years, tonnage demand across the whole continent often failed to rise above single figures, with average per annum demand for the five years to 2008 at less than 10 tonnes.

While many of these buyers undoubtedly turned to gold as a ‘flight to quality’, prompted by the credit crunch and its aftermath, their return to gold has proved resilient, even as a sense of optimism has started to pervade some sectors of the investor community.

The rise in total retail investment demonstrates that investors are continuing to harness gold’s unique properties to protect their wealth. With the ongoing economic volatility, gold offers retail investors simplicity, transparency and security in a landscape of increasingly complex and volatile financial markets.

Investors are always looking to protect against inflation, currency and market volatility and irrespective of the prevailing economic conditions, gold’s unique diversification properties are important to investors. In the current uncertain economic conditions we are seeing continued support for gold, as an increasing number of investors understand its unique properties.

Source: http://www.moneycontrol.com/news/commodities/gold-appetite-to-pickas-people-adjust-to-new-price-wtc_483826.html