Forget high prices - gold buying spurts in India

With gold-backed loans on the rise and rural India enjoying the fruits of a bumper monsoon, farmers are stashing away their savings in gold and precious metals

Author: Shivom Seth
Posted:  Thursday , 18 Nov 2010
In the first 9 months of 2010, gold demand in India rose by as much as 79%, despite prices touching astronomical new highs. Between January and September 2010, gold demand went up to 650 tonnes from the 363 tonnes recorded in the same period in 2009. Prices in the same period rose by over 20% from the low of Rs 18,594 (US$409.6) per 10 gram of last year.

Releasing data on buying patterns, the World Gold Council said in absolute rupee terms, the demand for gold stood at Rs 1,133.02bn (US$24.96bn) this year, up from the Rs 1,053.2bn (US$24.9bn) registered over the same period last year.

Despite such a massive jump in consumption, analysts following the yellow metal are not completely unnerved. In fact, they anticipate a further inflation in the 79% number by the time the year ends, with the foresight of the experienced.



"In October, despite the price going past the Rs 22,000 (US$484) per 10 gm mark and a rise in silver purchases, retail buying carried on unchecked. From November to the end of the year, the great Indian wedding season is on, which will usher in its own buying spree among Indians,'' said Vallabhai Chanchodia, a bullion analyst with a brokerage firm here.

The WGC tends to agree with this opinion. "With the Indian wedding season coming up, we anticipate that gold demand will continue to reach greater heights," said Ajay Mitra, MD, Middle East and India, World Gold Council.

The anticipated further spurt in gold buying is based on two recent developments, in addition to the wedding season factor.

The first is the $600-billion quantitative easing by the US Federal Bank which is expected to weaken the dollar and fuel inflation by creating asset bubbles outside the US.

Analysts say gold will maintain its long-term upwards movement as part of the money from the second round of US stimulus flows into the asset. The huge amount of pumping is expected to increase the US fiscal deficit and the subsequent weakening of the dollar, which benefits commodities priced in that currency by making them cheaper for holders of other currencies.

The other reason is the booming stock markets in India, following which investors would like to park their excess income in "safe" investments.

Rural push

Experts also see a rise in demand due to the growing prosperity in rural India. A bumper  monsoon this year and growing income of rural India is has meant that people in those regions are buying more gold.

India's farm ministry has estimated that the summer-sown foodgrains output will rise 10.4% to 114.63 million tonnes, while production of the main seasonal crop, rice, will be around 80.41 million tonnes. All of this would ensure that there would be more money to spend with almost every farmer.

Several gold jewellery retailers are considering a move into rural areas of India in their bid to reach new customers. Malabar Gold regional director, Oshiane Asher, said that the interiors of Tamil Nadu has proved to be a reliable market.

"Unlike in Kerala, (which is in south India) where customers buy gold during festivals or marriages, people in Tamil Nadu buy gold soon after the birth of a daughter," he explained. This continues throughout the life of the girl child, right until her marriage, with small quantities of gold being bought by family and friends over the course of the intervening years.

Commenting on the growing prosperity in rural India, Ritesh Jain, head of fixed income at Religare Funds said a good monsoon and growing income of rural India, ``coupled with the fact that not much is going into fixed deposits these days, are driving people to buy more gold.''

Rural buyers are also seeking purer gold than in the past. Anjani Sinha, managing director and chairman of the National Spot Exchange in Mumbai, has maintained that despite the high prevailing price of gold, a rural push would ensure a 30 per cent rise in investors who are keen to move to some form of precious metal.

And farmers in rural India are also looking to the yellow metal as a hedge. As the price of gold rallies to a record-high in the country, gold collateralised loans have also gained in popularity amongst India's rural and semi-urban population. 

Several rural customers are pledging gold jewellery as collateral, to fulfill their short-term credit needs. Loan seekers deposit the yellow metal at official gold loan firms like Muthoot Finance and Manapurram, and receive up to 80% of the value of their gold. They are charged interest of approximately 2% a month, or 24% per annum.

The loan typically lasts for the duration of a year, when the bank returns the jewellery. If a borrower is unable fulfill the requirements of the loan, the jewellery might extend the duration or hike the interest rate. In very rare cases, the lender gets to keep the jewellery if there is no payment of any kind.

George Alexander Muthoot, CEO of the country's largest gold loan provider, Muthoot Finance, explained that the changing customer attitudes towards taking loans by pledging small amounts of gold, had also contributed to the growth of the market.

"Indian customers have demonstrated a change in their traditionally debt-averse psychology, promoting the creation of assets through growth in financial liabilities," Muthoot noted.

Lenders such as Muthoot Finance are looking to cash in on the gold rush; the Kerala-based company is reportedly looking to raise up to $180 million through an initial public offering (IPO) to meet future capital requirements for funding of loans.

Moreover, India's Tata group, known for the launch of the world's cheapest car. the Nano, has also tapped into the strong rural market for gold, through its jewellery arm, Titan.

In 2005, Titan launched GoldPlus, an affordable jewellery range. Today,  aggressive marketing efforts have ensured that the company has grown more than three-fold in the rural regions.

Titan set up 30 showrooms in small towns in 6 states around India, hoping to tap the mass market in rural areas. Setting out in a bus called the Gold Chariot, Titan sought to tackle the fragmented market.

The idea was that the Gold Chariot would travel around rural communities sponsoring charity events and training unemployed young people as security personnel and brand ambassadors to make a connection. And all the time, selling gold to the mesmerised rural consumer.

Over the course of almost three years, Titan contacted three million people and in 2009, 30% of the income for its GoldPlus arm came from these customers, up from 1.5% in 2006.

The firm is keen to add to its GoldPlus outlets this year. ``It is not easy to open stores in each town. The kind of designs demanded by the population varies widely even between two nearby towns. We will first consolidate and then expand the Goldplus network," said a Titan official.

The average investment per GoldPlus store is around $ 1.5 million and each store earns around Rs 200m per annum. Titan's two jewellery divisions (Tanishq and Goldplus) are expected to close the year with a turnover in excess of Rs 4.5bn ($ 1 billion) as against Rs 3.5bn ($ 789 million) earned last fiscal.

Each division uses around 15 tonnes of gold per annum and resorts to hedging to manage price fluctuations. Apart from the in-house manufacture of jewellery, the company also outsources a small portion.

It may be recalled that last year, India was hit by one of its worst-ever droughts, which crippled summer crops and, consequently, rural demand for gold. In 2009, gold purchases totalled around 343 tonnes.

Wait & watch

The WGC has said 2010 has been a year which has provided a clear indication of the diversity of gold. "With the prices of gold increasing on a regular basis, consumers now have adjusted their price expectations and are now watching for gold to reach the next level. While the fluctuations in the prices has reduced to a great extent, this has in turn reinforced the investment in gold and customers are now encouraged to make purchases in gold instead of deferring them for the future," Mitra said.

Gold jewellery demand in the country, the world's biggest gold consumer, grew by 36 per cent to 184.5 tonnes in the 3rd quarter ended September, according to the WGC. The sale of jewellery items stood 135.2 tonnes in the July-September period of 2009, it said in its latest report.

In rupee terms, India's jewellery demand reached an astounding Rs 33,800 crore in the third quarter, 67% higher than the same period of 2009.

Overall global gold jewellery demand for full-year 2010 is likely to exceed that of 2009 as demand in India is expected to continue to recover this year, Mitra added.

In the third quarter (Q3), total domestic demand including jewellery and investment was 229.5 tonne against 179.6 tonne a year ago. While jewellery demand during the quarter was up by 36% at 184.5 tonne, investment (bars and coins) has been flat at 45 tonne.

However, investment demand in the first nine months of 2010 has grown at 108% to 136.9 tonne. Domestic demand during Q3 accounted for 25% of global demand which stood at 922 tonne, up 12% from the September quarter last year.

Global jewellery demand was up 8% driven by India, China, Russia and Turkey, while retail investment demand was up 25%.

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