The Hindu Business Line : `Growing economy offers scope for investment in gold'

"If gold prices remain stable and do not return to the levels of volatility witnessed in the first nine months of 2006, demand is likely to grow by up to 50 per cent,'' says World Gold Council CEO.

Chennai, Sept. 10

India's per capita gold consumption is 0.7 gm, half of the US and one third of the West Asian countries, but the country imported 317 tonnes in the second quarter of 2007 equivalent to half the global mine output in the same quarter.

The World Gold Council sees great opportunity for further growth and stresses the need to market the benefits of gold as an investment to fight off competition from other products.

In an e-mail interview with Business Line, Mr James Burton, CEO of the World Gold Council (WGC), said: "In per capita terms, spending on gold in India is still very low at 17 gm and as the economy grows this provides a great opportunity for further growth."

He said the WGC's outlook for gold demand in India was very positive. "If gold prices remain stable and do not return to the levels of volatility witnessed in the first nine months of 2006, demand is likely to grow by up to 50 per cent. In 2006, India's demand for gold was 715.5 tonnes. Our latest figures show India's gold demand in the first half of 2007 was 528.2 tonnes including jewellery and net retail investment demand."

Excerpts from the interview:

Sub-prime mess and gold

"The impact has been negligible. Gold's safe haven properties do not normally result in a knee-jerk reaction to a market blip such as the current sub-prime crisis.

Rather, investors see gold as insurance over the longer term. There has been no major impact on the gold price as a result of the current turbulence and there is plenty of research to show returns on gold tend not to be correlated with mainstream financial assets."

Record de-hedging

"De-hedging is an erratic series and the fact that the second quarter was (just) a record is of less relevance than the fact that it has been generally strong in recent quarters.

Because of the way gold financial markets operate hedging (mainly mining companies selling forward) increases the supply of gold to the market while de-hedging reduces it.

Since 2001 mining companies as a whole have been de-hedging and this, by reducing supply, has been positive for the price.

They have been de-hedging as a whole since they believe that the gold price is likely to rise further and want exposure to this rather than selling forward to a price that is then locked in."

Need for an interbank gold market in India

"An interbank gold market allows greater liquidity in the market, allows the development of more structured products, for greater lending capabilities and greater transactional opportunities. London's market is an excellent example."

Impact of the sale of gold by central banks on gold price

"Signatories of the Central Bank Gold Agreement have stepped up the pace of selling recently but their annual sales remain capped at 500 tonnes.

Given the strength of current demand for gold, the additional sales compared to last year can easily be absorbed by the market."

Global trends

"Global demand for gold jewellery in the second quarter reached $14.5 billion, 37 per cent higher than a year earlier and a record.

New dollar records were also set for industrial demand, up 9 per cent on second quarter of 2006, and for net retail investment, up 60 per cent. Total identifiable demand for gold was $19.8 billion, 27 per cent higher than a year earlier and the second highest quarter ever.

In dollar terms, identifiable demand for gold in the first half of 2007 was more than double the level of just four years earlier - up 124 per cent, three times the (nominal) growth rate of the global economy. Demand for gold jewellery doubled over the same period. In tonnage terms, total identifiable demand for gold in the second quarter was 19 per cent higher than a year earlier and that for jewellery was 29 per cent higher. For the first half year, total identifiable demand was up 11 per cent and jewellery rose 22 per cent - a substantial recovery from a period where demand had been dented by price volatility.

Institutional investment, which can only be calculated as a residual when all the more readily identifiable categories of demand have been measured, was the weak spot for gold demand in Q2. Available information, including data from the futures exchanges, suggests that selling by hedge funds and similar institutions was responsible for a fall in gold held by this segment. There was also a small reduction in gold held in exchange traded funds but these have since more than recovered with holdings reaching new peaks.

Gold as industrial agent

Gold possesses a unique combination of properties that have resulted in its use in a wide range of industrial applications. These applications account for 450 tonnes of gold per annum.

There are good reasons to believe that the use of gold in many of these applications will increase in the coming years. In the automotive sector, perhaps the most exciting recent development was the announcement earlier this year that the US-based Nanostellar Inc had developed a product using gold as an oxidation catalyst. It enables manufacturers of light- and heavy-duty diesel engines to reduce noxious emissions by as much as 40 per cent more than existing pure-platinum catalysts at equal cost. We are watching the development of this product very carefully. There are other industrial trials that are currently underway using gold catalysts, including the control of mercury emissions from power stations, applications in chemical production and water treatment to name just a few a few.

Sustainable mining practices

The World Gold Council is working with trade bodies and NGOs to promote responsible ethical, social and environmental practices throughout the diamond and gold jewellery supply chain, from mine to retail. Touch of Gold, a WGC report issued in 2005, demonstrated how gold has become one of the most important exports for heavily indebted poor countries and illustrated the benefits that gold mining brings to developing countries.

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`Growing economy offers scope for investment in gold'