BOMBAY, 8 December 2003 — India and gold, these two are inseparable. It is indeed ironical, foreign papers continue showing pictures of a poor India, yet it is the largest consumer of gold. These two factors, however contrasting, are very much the truth.
Indians seem to have an insatiable urge for gold. Poverty or no poverty, priority amongst Indians is to purchase gold. Though the purchase of gold is labeled as “security for the future”, the tendency amongst all is to merely hoard gold. And continue buying more gold.
Little wonder then that on Dec. 4 this week, domestic gold prices hit a new high. Standard gold reached a new all-time high of Rs.6,040 per 10 gram while pure gold was quoted at Rs.6,080 per 10 gram.
Bullion experts say that firm international prices and strong demand driven by wedding season in the country have led to this runaway prices of gold.
The biggest sole factor is undoubtedly, the weakening dollar which has now pushed investors to put their money into hard assets internationally and the fresh lows against Euro has continued to kick the gold price upward. Internationally gold has created a new seven-and-a half-year high, as against this, the domestic market has witnessed only a near year high.
Analysts explain that India’s pricing of gold is purely based on dollar-rupee currency conversion as it is imported. The dollar-rupee rate was about 48 then as against today’s Rs.45.54/56 to a dollar. The domestic gold price may witness an all-time high if gold crosses $400. Gold played around with the $400-an-ounce level on fears of further Al-Qaeda attacks but failed to hit the March 1996 level due to profit-taking in the Asian and European markets.
As per the latest quarterly report by Gold Fields Mineral Services, an independent London-based commodity research and consulting company, specializing in the analysis of the precious metals markets, global demand for gold and jewelry fabrication in the third quarter (July to September) increased by over 5 percent primarily due to strong gains in India.
Demand in India increased from 14.1 tons from 13.19 tons. On the global front, the chief feature on the demand side in the third quarter was the jump in the net investment figure to 185 tons from 34 tons in April-June, a jump of more than 150 tons quarter-on-quarter. Despite substantial increase in gold prices, offtake has increased by 5 percent indicating a strong demand for gold jewelry globally.
Despite the surge in price of gold, what is also now being seen is that demand for the yellow metal has plunged by over 75 percent though the marriage season is still on.
According to Ahmedabad-based bullion trader Ashok Soni, daily gold trading volumes at the Ahmedabad Bullion Market, which typically averaged 100-150 kgs, had dropped sharply and were currently hovering at around 25-30 kgs. The city is one of the major gold trading centers in the country. According to estimates available, gold imports into Bombay too were down to around 200 kg to 250 kg a day against the normal daily buying levels of about 500 kg.
Jewelry sales too have plummeted by over 50 percent, with hardly any takers for either gold coins, biscuits or jewelry. Jewelry makers say that due to the soaring price, only those who cannot postpone buying of gold due to an impending wedding or any other function, buy gold. It is now become a need-based buying. At the current rate of gold, people realize that it is pointless to buy gold for investment or hoarding purposes. Bullion investors are now busy booking profits and there are no new buyers.
So then when there are so many sellers, why is the gold price continuing to surge? Analysts explain that prices are going up despite low demand because global trends were dictating the price rise as India was heavily dependent on imports. Imports normally account for 70 percent of over 800 tons of gold consumed by the Indian market each year. The persistent fall in the dollar and the sharp rise in the euro is driving international investors toward gold.
Another scenario which has emerged is the change in the geographical consumption of bullion in the major Indian states. States in the south, Andhra Pradesh, Tamil Nadu, Karnataka and Kerala gobble about 45 percent of the gold market pegged at about 790 tons per annum. Due to higher incidence of taxation there, bullion business is seen shifting to other states. While the rest of India pays a tax of about 1 percent on gold jewelry, Karnataka, Tamil Nadu and Kerala carry a burden of up to 4.5 percent. Tax on silverware is about 4 percent in Tamil Nadu.
Incidentally, Kerala boasts of the highest per capita gold consumption in the country. Other large markets like Uttar Pradesh, Delhi , Maharashtra and West Bengal have a 1 percent tax on gold jewelry.
Well, tax or no tax , there is no denying that the fascination for gold will remain for the Indians. The current price rise is a temporary reprieve and soon Indians will be back to buying gold in all their frenzy.
