India overtakes China as the largest gold market

A sizeable chunk of Indian population may still be living below the poverty line, but when it comes to buying gold, Indians have again proved that they are not behind anyone. Indians spent around Rs 32,000 crore ($ 6.9 billion) to buy gold in the first three months (January-March) of the calendar year. This is nearly ten times of Rs 3,250 crore ($ 708 million) they spent to accumulate gold in the same period of last year.

In the January-March quarter this year, India was the strongest performing gold market in the world as total consumer demand surged 698 per cent to 193.5 tonnes. When compared to this, gold demand in the same period of last year was only 24.2 tonnes —worth around Rs 3,250 crore at the then markert price of around Rs 14,500 per 10 grams. The inflows into the gold market are much more than what foreign institutional investors (FIIs) put — Rs 20,000 crore — in secondary stocks and new issues put together in the last four months. On the other hand, assets under the management (AUM) of mutual funds fell by Rs 46,000 crore during the January-March period of 2010

The 27 per cent rise (year-on-year) in prices doesn't seem to have affected the demand for gold. On the contrary, demand has been shooting up in the country. India regained the status as the largest gold market by overtaking China which registered only an 18 per cent rise in demand at 132 tonnes. The strong demand in India is despite high local gold prices, which on May 12 in India increased to Rs 56,032/0z, the highest level for the year, while at the same time in China prices reached an all-time high of RMB8,480/oz, suggesting that consumers in India and China are becoming accustomed to higher gold prices.

"With the global economic recovery still burdened by high and rising debt levels in Western economies, as well as the renewed threat of recession driving down the US dollar and equities, the outlook for gold as a liquid, reliable asset class and as a store of wealth remains highly favourable," said Aram Shishmanian, CEO of the World Gold Council. In 2009, India accounted for 25 per cent of gold jewellery consumption, 19 per cent of total net retail investment demand (coins and bars) and 17 per cent of other industrial and decorative demand on a global basis.

Gold jewellery demand rose from 37.7 tonnes to 147.5 tonnes in the three months, but the rise in net retail investments (increased from -13.5 tonnes to +46 tonnes) has been phenomenal. Indian investors put $ 1.64 bn in gold as against an outflow of $ 394 mn in the same quarter last year. The RBI move to buy 200 tonnes of gold could have fuelled the perception among Indian consumers that gold is reliable and may have helped to reinforce the belief that prices are well supported. The jewellery sector accounted for 75 per cent of total domestic gold demand in 2009 and, with an estimated 10 million marriages a year taking place in India, wedding-related demand accounts for a substantial proportion of overall jewellery demand. "Since the fourth quarter of 2009, jewellery demand has been comparatively stronger as domestic consumers became reconciled to making their necessary purchases, notwithstanding prices rising to new record levels in excess of Rs 56,000/oz. As consumers have adjusted their price expectations upwards, a further rise in the price could be anticipated," WGC said.

Gold is one of the limited ways in which investors can diversify their currency exposure. This is because the rupee is not yet fully convertible and Indians are only allowed to hold financial assets in rupees. Gold loan business has also emerged big as people find it convenient to take loans by pledging gold. In terms of Indian gold ETF investment, holdings remain small but have shown strong growth in recent years.

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