Yellow fever grips India
Nandita Jain/Commodity Online
November 13, 2007 17:08 IST
In India, all that glisters is gold. That is the 21st century message the
one-billion strong India, witnessing a surge in consumer spending, is sending
out to the world. If you have any doubt about Indian consumer's obsession with
gold, just walk into any shopping mall, busy streets and market roads across
Indian cities and towns. The shops which are swarmed by customers are certainly
jewellery showrooms these days.
An unprecedented consumer spending boom across India is making the yellow metal
glitter. Yes, the gold market is dazzling in the country and analysts have
predicted that gold consumption will rise to a record 900 tonnes this year.
Kotak Commodity Associate Vice President Si Kannan is very bullish on Gold in
coming years but with a word of caution. "For investors I would advise them to
keep a check on the dips in gold price," he says. A day to day watch, he adds,
is necessary since many times gold dips barely for five minutes and that should
be a great time to be in market and corner your position by buying it. Kannan
predicts that next three years will bring gold to $ 900 per ounce. The only
concern for the Indian market is the rise of rupee vis-a-vis dollar and that
could be a problem for gold prices.
The strengthening of rupee against US dollar and rising consumer spending have
raised India's gold demand by as much as 72 per cent in the first half of the
year. A report from the World Gold Council says demand for gold in India
reached an all-time high of 317 tonnes in the second quarter of 2007. The
figures are nearly double of what was sold last year and equal to half the
global mined output for the same period. Of this, only 10-15 per cent was
recycled gold, indicating strong demand for fresh imports.
Traders predict that if the current demand continues, the full-year consumption
of gold in India could go up by 30 per cent on year to 900 tonnes.
Traditionally, gold demand peaks in the country during the second half during
festivals and wedding season. This year is also not different. People in rural
and urban areas have already started stocking up the yellow metal for festivals
like Diwali and Dusshera.
India has set up more than 3,000 offices worldwide for promotion and marketing
of Indian diamonds. The Indian diamond industry has acquired leadership
position in cutting and polishing of rough diamonds. India has the world's
largest cutting and polishing industry, employing around 800,000 people
(constituting 94 per cent of global workers) with more than 500 hi-tech laser
machines.
The price of gold has been rising for over six years. It gained 158% since
then. That works out to 26% per annum, which has consistently been better than
most other markets. Global commodity companies believe that gold prices will
rise for years to come, eventually reaching at least $2000 and it will probably
go even higher. Investment experts say gold is the best commodity to invest in
because it has stood the test of time. "Gold has a 5,000-year solid track
record. It is a time-tested and valuable commodity. It always has been, and it
always will be. So it is the ideal commodity to invest in these days," says
Prahlad Patel, a gold investment expert based in Mumbai. According to him, gold
is real money and it has maintained its purchasing power over the centuries.
"As the dollar continues to slide, and spending and money creation continue on
their merry way, gold will be the ultimate beneficiary," he added.
Experts have also predicted that China will become the largest gold producer in
the world by 2010. Between 1997 and 2006 production of gold in China increased
by 162.8 tonnes to 247.2 tonnes. While gold production in traditional producing
countries such as South Africa has declined over recent years, output from
emerging gold producing countries has increased from 17.7 per cent to 29.8 per
cent in the last ten years. China's gold production for the first quarter of
2007 was recently recorded at 56.183 tonnes, an increase of 15.99 per cent on
the same period last year.
Should India hike its gold reserves?
Should India increase its gold reserves to further fuel the booming economy?
This is one question that the Reserve Bank of India is debating these days.
Globally, India is ranked sixth in the top-ten list of the gold and currency
reserves. The first three positions are being held by Japan, Russia and China.
China has state currency reserves with over $940 billion, while Japan has
$871.9 billion currency reserves. Russia is in the third position with $265.6
billion. Taiwan occupies the fourth position with $260.4 billion reserves,
while South Korea is placed fifth with $225.7 billion reserves, followed by
India with $164 billion and Singapore with $128.7 billion. Hong Kong, Germany
and France wrap up the list of ten leaders.
These days, speculation is rife on whether India should hike the proportion of
gold in the country's foreign exchange reserves. In the last few years, the
foreign exchange reserves in India have risen significantly while gold reserves
have remained static. Today, the proportion of gold in forex reserves has come
down to a pitiful low of 3.6 per cent. The foreign exchange reserves in India
are invested in multi-currency, multi-asset portfolios.
According to official data, in March 2006, out of the total foreign currency
assets of $145.1 billion, $35.2 billion was invested in securities, $65.4
billion was deposited with other central banks -- BIS & IMF -- and $44.5
billion was in the form of deposits with foreign commercial banks. According to
former Reserve Bank of India deputy governor S S Tarapore gold as a reserve
asset has a longer and more enduring history than flat money, and thus deserved
a better representation in the country's forex reserves. He has argued that it
is time India increased the gold reserves in tune with the booming economy.
But this is not a decision which the government would find easy to take. For
instance, if the gold proportion of the forex reserves is raised to 10% of
total reserves, it would require a forex outgo to the tune of about $15 billion
at current prices. Moreover, if India hikes the gold reserves, it could also
affect the bullion market in a big way. But officials in the finance ministry
said discussions are on between the Reserve Bank experts and key officers of
the Prime Minister's Office to decide whether it is prudent for India to hike
the gold reserves. In fact, several central banks like in China and Russia are
now considering increase in their reserves.
Be smarter than spam. See how smart SpamGuard is at giving junk email the
boot with the All-new Yahoo! Mail. Click on Options in Mail and switch to New
Mail today or register for free at http://mail.yahoo.ca
