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. I had written a three part series on Gold and with all the excitement of new highs in the gold market a brief update seems in order. India's Love
of Gold - Part 1 - The History of the Passion
The sales tax has been made uniform all over India and hence the disadvantage of high taxes in Bombay is eliminated. Of course major changes in government policy are needed to transform Bombay into a major international center for gold trading which will not happen in the near future. The requirement to be a major gold trading center necessitates the trading of gold using derivatives, which invariably leads to speculation. One of the principal outcomes of derivatives trading is the transfer of wealth from the many to the few (notwithstanding whatever false propaganda the authorities and those in power may spread about derivatives). Hence, one point of view is that the absence of derivatives trading and the presence of only physical trading in India is a blessing in disguise, a view with which I sympathize largely. The gold market has broken out to a new 6-year high of US$ 390 per oz., on the back of geopolitical worries about North Korea and war with Iraq. Gold touched Rs. 6000 per 10 grams last week, a new all-time high in India! Subsequent reaction has seen some easing in the price of gold, and the media and the "experts" are quite skeptical about the sustainability of these high prices. The logic is that the central banks have a lot of gold that they will dump onto the markets since these gold reserves are a "dead and non-productive asset" anyway. The mildest charitable description that I can think of for these so-called "experts" is ignorance and all its various synonyms. These so-called "experts" obviously do not remember that India was saved in 1990 from default by pledging 40 tonnes of this "dead and non-productive asset", and South Korea's currency stabilized when the government collected gold, a "dead and non-productive asset", from their citizens to back their currency in 1997. The media's track record on understanding and forecasts of financial markets is of course obvious, so the less said the better. New highs for gold prices lie in the future, notwithstanding whatever the media and the "experts" may say, assert or tout! Generally, the figure floating 'out there' is that India holds 11,000 tonnes of gold that I had also mentioned in my earlier article. Mr. Vijay Sarda, a Mumbai-based bullion dealer, said that India has been importing gold at least since 1933, and earlier also. These imports were sizable. Official imports were banned in 1962 after which smuggling took over. Then imports were again liberalized in 1992. Now consider a peak net import rate of say 600 tonnes per annum, and 11,000 tonnes is about 19 years of imports. If you consider an average rate of say 300 tonnes per annum, 11,000 tonnes is about 37 years of imports only! If you consider an average of 300 tonnes of net imports, for 70 years (from 1933 to 2002) this amounts to about 21,000 tonnes! Consider the older gold holdings with the people and you could justify a figure anywhere between 20,000 and 40,000 tonnes! The gist is that it is very hard to estimate the gold holdings with the people of India but the holdings should definitely be far in excess of 11,000 tonnes! The Reserve Bank of India holds only 358 tonnes of gold as of year-end 2000. Lastly, the high prices of gold have prompted a huge amount of retail selling (misplaced enthusiasm no doubt) and a severe contraction in imports of gold. In fact gold imports have declined to negligible amounts in the last month and a half, which used to average between 35 and 50 tonnes per month. The market seems paralyzed by the high prices and practically speaking, all buying has stopped. As a consequence the local prices are lower than the import prices. If this situation persists or aggravates, we may see a net export situation out of India! Mr. Vijay Sarda observed that there is large quantum of dishoarding from the rural areas of India due to the present high prices of gold. Some of the probable reasons could be: The spread of television in the rural areas has spawned the consumerist behaviour amongst the rural folks. They now want to buy televisions, two-wheelers and other consumer goods rather than buy gold. This year has seen poor rains and the crops are bad this year. This may have led to financial stress prompting dishoarding of gold especially catalyzed by the new high prices in Indian Rupee terms. There has been a tendency in society the world over (I think) to try and make money at any cost, in any way, and with least effort. The earlier values of earning as a compensation for providing services or products to society is now replaced by the casino concept of earning money trade stocks, bonds and other paper assets/derivatives without worrying about the linkage to the real economy! So you can sell on highs and buy back when the price goes lower trade gold also! There will of course be other reasons that may have prompted our rural folks to sell which I may not be aware of. I would like to know if you think of any other reasons. So the only question I ask is when will we Indians accept that high prices of gold are here to stay and get back to the business of buying gold as usual? Pinank Mehta Pinank Mehta is a director with Métier Capital Management Pvt. Ltd. advising on wealth management. He can be contacted at metier@bol.net.in
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An update on gold in India
The
estimated imports into India in 2002 were about 415 tonnes and
total demand was about 800 tonnes, which means the recycled gold
was about 385 tonnes. Total world demand for 2002 is estimated
at about 3200 tonnes. The average price of gold for 2002 has
gone up to about Rs 5100 per 10 grams (rough estimates assuming
an average rate of Rs 48.50 per US $ for the year 2002), which
is an increase of about 18% (excluding duties) over the previous
year. (Data on demand is courtesy of World Gold Council, India)