The Hindu Business Line : A safer haven

India's affinity for gold clearly plays out the theory put forward by WGC, that gold is a `safe haven' investment, say Latha Venkatraman and Dhimant Bhatt.

THERE'S never a dull moment for the gold jewellery industry in India.

The desire to purchase jewellery does not necessarily need a reason (impulsive purchase) though there is never a dearth of reason: a wedding, festival season or simply a craving for something new. Now, gold is also emerging as a designer, aspirational purchase, catching the fancy of the upwardly mobile consumer.

Clearly, India is the world's biggest market for gold, a fact well acknowledged by the World Gold Council, bullion market functionaries, mining companies and economists.

A WGC estimate says that Indians hold 13,000 tonnes of gold in the form of jewellery and gold bars. This is estimated to be 7 per cent of the global `above the ground' stocks. The value of gold held by Indians is estimated to be worth Rs 700,000 crore.

India's affinity for gold clearly plays out the theory put forward by WGC, that gold is a `safe haven' investment, especially during times of economic crisis and a fall in equity markets.

Across the world, especially in developing countries, the demand for gold is known to be both income elastic and price elastic. Traditionally, India's demand for gold hinges on factors such as price of the yellow metal, satisfactory monsoon leading to improved rural incomes and overall robust economic growth. A constant factor that drives offtake of gold is the wedding season buying.

India's gold economy began flourishing in the early 1990s when the government opened up gold imports. Until then much of the gold flow into the country was through unofficial channels because of severe import restrictions.

Inflows were encouraged by the large differential between Indian and international prices. Various fiscal and other measures were put in place: customs duty on imports of gold slashed, banks allowed to import gold for sale to jewellery exporters, expatriate Indians were allowed to bring in gold and so on.

While several changes were brought about, one fact remained unchanged through the last 15 years: there was no price discovery system in arriving at the price of gold. Locally traded prices largely tracked international movement but the prices were not exactly market determined.

In the changing economic paradigm, where gold has entered the futures trade mode, the need for developing a healthy and transparent spot market is extremely critical.

The development of the spot market for gold will throw open a huge opportunity to position India as a leading gold trading centre. The logical follow-up to such a measure would be the entry of banks and mutual funds in gold investment options.

In the preceding years when the global economy showed signs of a slowdown, investors worldwide sought comfort in investing in gold. It has often emerged as a preferred investment avenue.

Demand for gold in India continues to be robust. According to the Ministry of Commerce, during April-June 2004, Indian imports were 202 tonnes, significantly up from the same period in the previous year. In the first quarter of calendar year 2004, consumer demand in India for gold, both jewellery and net retail investment, rose by 25 per cent in tonnage terms and 37 per cent in rupee terms, according to the WGC.

While jewellery demand continues unabated, there is a growing interest in gold as a retail investment in the form of coins and bars. With several banks losing the confidence of depositors, the importance of gold as a stable and secure investment option is going to be heightened.

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