Mutual Funds

High on gold

Rajalakshmi Sivam | Updated on February 12, 2011



India's appetite for gold is making heads turn. Sample the numbers below and you will know why:

For the first nine months of 2010, global jewellery demand was 1468.2 tonnes.

A little over third of this was consumed by India; two years back, the country accounted for 23 per cent of the world's jewellery consumption.

India's jewellery consumption has risen to 513.5 tonnes in the nine months to September of last year (restated reports of World Gold Council), which is a 73 per cent increase over the same period the previous year.

The total holding of all the domestically listed Gold-ETFs stood at 15 tonnes by end-2010, reports the WGC. Benchmark Mutual Fund's Gold ETF holdings more than doubled to 7.49 tonnes last year.

WGC reports that India's gold demand has been rising at the rate of 13 per cent annually over the last 10 years.

Gold as investment

There is a change in the way Indian households look at gold — the yellow metal is no more treasured solely for its ornamental value. With real interest rate turning negative on inflation rising to the higher double-digit mark, people are running out of low-risk investment options. So they view gold as a diversifier. Lacklustre performance of the equity markets and the increasing price volatility here could have also forced investors to move to gold for its safe-haven property. And unlike a few years back when there were few options for gold investors, the choices are many now. You can buy it as ETF from a mutual fund, stack it up in the form of e-gold or buy it as coins from India Post office.

Rising purchasing power

Rising income levels among Indians is another key driver for gold demand, especially for jewellery. While good harvest and higher support prices for farm output from the government helped improve rural income, the Sixth Pay Commission also helped increase people's discretionary spending by a large extent. Defying past trends of drop in consumption in times of rising price, there was a sharp increase in jewellery demand last year. Though rupee's appreciation against dollar helped buyers to some extent, the yellow metal still was pricey at 24 per cent higher than the previous year.

Indian consumers seem to be getting accustomed to higher gold prices. Fear of opportunity loss in postponing purchase could also be driving sales at higher prices.

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Published on February 12, 2011
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