In the cool weather of the first few months of the year, India's wedding season swings into high gear. Indian brides and grooms of means like to stage lavish celebrations, and on display at those nuptials is another grand Indian love affair: gold, for which the country has had a long-standing affection. India is the world's biggest consumer of the commodity, and much of it goes into women's jewellery.
Gold has been a global star asset over the past five years, and with so many investors, analysts and mining executives attempting to predict what will happen next to its price, it's never been more crucial to understand the sources of demand for it. This makes the banquet halls of India hard to ignore. Yes, the influence financial speculators and central banks have on the price of gold is intriguing, and often dramatic in the short term, but straightforward consumer demand is still the largest factor.
According to the World Gold Council, which represents 27 major gold producers, 68% of the worldwide demand for bullion over the five years from 2004 to the end of 2008 was for use in jewellery, compared with just 19% for investment purposes and 14% for industrial uses. On a geographic basis, the council says that East Asia, the Indian subcontinent and the Middle East accounted for 70% of global demand in 2008.
In India and that other gargantuan gold-loving country, China, the traditional affinity for keeping a large portion of family wealth in the metal remains as strong as ever. As people's personal incomes increase in those two countries and in other developing nations, the middle classes will save more, thereby boosting demand for gold and sustaining its price. India's annual economic growth rate has averaged 8.6% over the past five years. Although the pace has slowed recently, it will likely return to that level by 2012.
The National Spot Exchange, a major commodities exchange based in Mumbai, estimates that Indians already have close to 25,000 tonnes of bullion, coins and jewellery stashed away in private vaults. That's a large proportion of the Gold Council's estimate of the entire holdings of gold worldwide: 163,000 tonnes.
India's belief in the security of gold as an asset extends to its public coffers. Last October, the Reserve Bank of India made the largest single purchase of bullion by a central bank in the past three decades: It spent $6.7 billion (U.S.) to buy 200 tonnes from the International Monetary Fund.
That faith in gold is quaintly retro in some respects. When the IMF was formally established in 1945, a quarter of the reserves provided by the founding countries consisted of bullion. In 1971, however, the United States severed its dollars-for-bullion relationship. Today, no major country's currency is tied to gold, and it no longer makes sense for any institution to have a high proportion of its investment portfolio tied up in the metal itself. And, in addition to complex financial considerations and price volatility, bullion is physically cumbersome. Last September, the IMF said it would sell off about an eighth of its total holdings of 3,005.3 tonnes. India, with 557.7 tonnes, ranks eleventh in terms of central bank gold holdings. The U.S is in first place with 8,133.5 tonnes, and Canada is number 78, with just 3.4 tonnes.
The appetite for gold in India and China may also provide opportunities for Canada, home to several major gold producers and a great deal of mining finance expertise, if only Canadians can persuade more investors in the East to look beyond the metal itself. ScotiaMocatta, the precious metals trading arm of the Bank of Nova Scotia, currently offers hedging instruments to companies in India and is an approved custodian for gold exchange-traded funds, although it has yet to introduce any gold ETFs of its own.
As India's economic growth has slowed recently, however, some Indians have begun recycling their gold, which has acted as a drag on the price. We're all familiar with the merchants in Canada and the U.S. who will pay cash for anything gold-even teeth. The business of buying up old jewellery and broken fillings and melting them down is thriving in India, too. As well, savvy Indian women are also having goldsmiths refashion old pieces. In total, the country's new gold purchases declined by 33% in 2009.
In January, however, the World Gold Council, which is concerned about "scrapping" (as the practice is known), said that India's appetite for imports of fresh bullion appeared to be recovering. In a country where demand for gold is spurred largely by tradition and emotions, one of the strongest motives is the desire to present an image of wealth and sophistication. Ultimately, that will be good for gold producers and investors alike.
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