In a country that is known for its affinity for gold, authorities and powers that should have proposed introduction of financial instruments aligning with the yellow metal much earlier to open new windows for channelling investments in the precious metals space, bullion dealers and analysts said.

For a country where the allure of gold goes back to hundreds of years, the shift in investment from the physical form to a financial instrument is not going to happen in a hurry.

Investment

The process is a long-drawn one as convincing investors the benefits of opting for a gold paper product instead of the physical form will take time, they believe.

The Government is worried about Gold Import Bill and its impact on the current account deficit. India has been the world’s largest consumer and importer of gold along with China. These two countries alone account for nearly 50 per cent of the world’s demand for gold in the form of jewellery and investment, data from World Gold Council show.

For the 12 months ending June 2012, demand in India stood at 773.5 tonnes and in China at 828.3 tonnes against the world’s total demand of 3,263.3 tonnes, WGC data showed.

Imports

In 2012, India’s gold imports are likely to be lower than the previous year mainly because of consistent high prices caused by rising gold prices and weakening of the rupee against the dollar and overall liquidity crunch due to rising prices of goods and services. In 2011, the country had imported 969 tonnes of yellow metal, according to WGC.

India’s huge gold imports have had an impact on the current account deficit which was 4.1 per cent of the gross domestic product for the year ending March 31, 2012.

As security

However, consumers in India believe that gold is security that is a hedge against contingencies arising in the larger economy and within the family.

Buying of gold in India is not confined only to those who are rich but also the poor. Purchases are again not confined to urban centres but also villages and towns, and across communities and faiths. Much of the gold buying in India is in the form of jewellery though there has been a shift in consumers’ preference for coins, bars and also gold exchange traded fund products.

But high inflation leading to lower funds available for discretionary spending and a short wedding season in 2012 has led to reduced demand for jewellery. Consumers have stepped up scrap sales to maintain jewellery buying, jewellers said.

This year demand has been slow but Indians’ affinity to gold and gold jewellery is far from fading. Indians will continue to buy gold and the shift away from the physical form of the yellow metal will take years, they said.

Jewellery will be the main choice of Indians, but demand for other forms such as coins, bars and exchange traded funds will grow substantially in the years to come.

(This article was published on September 19, 2012)
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