- The Gold Forecaster
Gold Market 2004/2005
Julian D.W. Phillips
Sep 26, 2005
Excerpts from the "Global
Watch - The Gold Forecaster."
That was the week
The growing feature
of the global gold markets is now, within the broad pattern of
gold price movements, the gold price now rises against a falling
$ and rises against a falling €!
this second part of this article Daman Prakash an expert on the
Indian Gold market gives his views on the Indian market over
the last year and the developments over that time. He gives perhaps
the deepest insight into this key market for gold, that is available
anywhere. Our thanks go to him for this clear positive picture
and the pointers to the direction the Indian market is travelling.
It could well give support to a rising gold price, in an orderly
The Indian Gold
Market 2004 / 2005
of Imports into India.
The Indian Ministry
of Finance quoted net imports of around 400 tonnes of gold imported
for local use, but GFMS quoted a gross figure of 500 tonnes for
gold for local use as well as gold for re-export. If one excludes
exported gold jewellery, the figure does bring it well below
at the "Global Watch - The Gold Forecaster",
believe the difference is significant as we will see in future
years, as the Indian culture is taken overseas by the well-educated
sons and daughters of India into situations where their investments
into gold will rise alongside their incomes. The influence of
home and their Elders will no doubt keep this custom going for
many generations and hopefully improve the gold content of gold
jewellery abroad, after all, in India, jewellery serves as a
store of wealth, preventing the jewellery factor in the cost
from lowering the relationship between the gold price and the
weight of the jewellery itself. Many Middle Eastern individual
and a growing number from outside these cultures are moving towards
holding gold for itself, in the form of low premium priced [over
the gold content] gold.
away from Bar and Coin.
Daman disagrees that
the level of coin minting and bar hoarding has increase by 60%.
He reports that ICICI sold less than a ton of coins, despite
the large campaign to promote such investment levels. MMTC and
other banks, Authorised Importer, have very low (dismally low)
figures. After verifying his opinion with all the leading bullion
dealers like Zaveri of Ahmedabad, Kiran from Jaipur, Jindal and
MD Overseas from Delhi, MNC Bullion and Surana from Chennai,
Ridhi Sidhi from Mumbai, little support could be found for the
increase in the levels of coin minting and bar hoarding. Daman
points out that the traders he spoke to, when put together account
for 65% of the India's imports.
In India, such reports by the
leading Importers can be validated and are correct. Due to local
regulations and historic legacy of smuggling days, a large percentage
of the jewellery business is still accurately recorded. On enquiry
with some of the well-known and popular jewellers, Daman found
that they sold paltry 1 or 2% of turnover in the form of coins
or bars during the period. When given as corporate gifts they
arrive in the form of 1gm, 2gm, 5gm and 8 gm. Coins, but in terms
of tonnage they represent an insignificant portion.
of commodity exchanges.
The arrival of MCX and NCDEX- the multi commodity exchanges,
have resulted in the removal of the need to own bar gold.
The now huge turnover in Gold and Silver futures reflects the
popularity of these exchanges with investors. Most of the people,
who invest in Gold physically, have shifted to these exchanges
for three reasons: -
1. Without any use of 'black money' [undeclared]
they can acquire more Gold and enjoy the convenience of selling
their gold quickly and easily. In the past people used to buy/sell
the physical Gold Bars with 'black money'.
2. Now they can deal on margin with far less money involved
[close to the international price] openly huge amounts in physical
gold in bar form. The Indian investor was quick to take this
opportunity and evidence suggests that physical buying in bar
for hoarding, has come down drastically this year.
3. The phenomenal turnover in MCX and NCDEX exchanges
have, in a very short time, became possible because of the very
active participation of a large number of small players
even from remote areas, because of the ease of dealing
provided through the use of the Cell [mobile] phone, which now
attract only local charges within a State or a province's borders.
A further gold market
facilitating improvement have been the use of Gold Loans, whereby
a jeweller could borrow physical gold at no set price but repay
when he sold the jewellery at the gold price at the time of the
receipt of the proceeds from the sale of jewellery. The scheme
works in India first by depositing a fixed deposit of the equivalent
of 110% of the value of the gold to be borrowed. Then one draws
down a Gold loan at a lower rate of interest. On the Fixed deposit
they earn a high rate of interest and so permit interest arbitrage.
This scheme has become very popular in India and the Indian central
Bank has recently allowed all banks to give Gold loans
for a period of 90 days.
For the last 2 years, Scotia,
the biggest player in the Indian gold market amongst the banks,
has been very active and successful in giving these loans to
most jewellers in town, to whom they lent as little as two thirds
of a Kg at a time. MMTC has provide this scheme to many jewellers
for a long time, but they have not had the same degree of success
as they limit such loans to 60 days, calling for the pricing
of the gold at that time. Scotia provides 180 days. SBI had limited
success and only with the largest of players as they remain very
Bull Market not a driver in the Indian market - Jewellery promotion
According to Daman
the Indian market is not experiencing higher volumes because
they believe the price will go higher, or to any promotion by
the World Gold Council of gold bars as a pure investment, waiting
for higher prices.
Daman relates this experience, "I was invited to address
an elite gathering at the Institute of Valuers consisting of
bankers and architects and was asked to speak on Gold and Silver
valuations. In my address, I advised the audience that it is
perfectly legal to own gold bars, besides informing them that
unwarranted jewellery conversion wastes money. My audience reacted
in disbelief! It took me a lot of explaining and persuasion,
with quotes from rules framed from 1999 onwards, to convince
them. In those days the possession of bars of gold of more than
50 grams would have landed a person in jail for 2 years as recently
as 1992. This fear remains even among the informed sections of
Daman reiterates that it was jewellery that paved the way for
the increased consumption we are seeing now and this was due
to the promotions, with innovative designs, discounts, festivals,
advertisements, fashion shows and large exhibitions, in which
the World Gold Council did play an exemplary part.
Profits - not a contributor to the increase in gold purchases.
The Indian Stock market
has enjoyed a tremendous rise in the last year and more. The
profits enjoyed there have not found their way into gold but
into real estate. If gold were such a draw card all the jewellers,
including the leaders, would not be vying with one another with
huge discounts on Gold prices per gram throughout this year after
taking Gold on loan from the Banks for manufacturing jewellery.
Evidence of this is that land prices in all the metropolitan
areas have doubled and tripled in 2005 alone. It is urban dwellers
that are investing more in life's luxuries.
of the reasons for the increase in gold imports to India.
1. Increased exports
[100 tonnes +]
2. Gold loan schemes enabling all leaders in jewellery
to launch huge discount schemes to the public.
3. The benefits of inter-state smuggling resulting from
concessional taxes in Jaipur, Noida and Ahmedabad.
4. All evidences suggest that whatever tonnage of increased
import has resulted only in more jewellery fabrication this year.
The number of jewellery shops has multiplied in India with all
the large ones attracting clients with various schemes and perennial
discounts as large as Rs. 40/50 per gram, equivalent to a discount
of 7% to 8%.
5. Their campaign is being well supported by the World
management of gold in Central Bank Reserves, by Argentina!
Argentina is a
nation that paid a heavy price by placing its currency on a "Currency
Board", holding the Peso at 1:1 with the U.S. $. Since then
it has had to battle to bring stability to the currency and encourage
capital inflows to the country. But it has succeeded and out
of those experiences comes an enlightened approach to using gold
in a nation's reserves.
Argentina's Central Bank Juan Basco has revealed an important
change in their views on gold, one that may initiate other Central
Banks turning their policy on gold to one of buying it, as a
reserve asset, not just selling it. Argentina has paved the way
by being active in the gold market both ways, to protect its
reserves and has done so effectively.
Here are some quotes from the Snr. Basco on the subject, which
are key to the successful use of gold in a Central Bank's reserves:
"Because the bank is now active in the market rather
than passive, it is adopting a totally different portfolio management
The liquidity in the
gold market has been proven ample for the bank's requirements. With $25 billion reserve assets (likely
to be $27 billion by the end of this year and compared with nine
billion in 2002), the government needs to control the volatility
of its portfolio and has introduced gold as part of the diversification
necessary to achieve that aim.
The bank takes the view
- Gold is recovering its
role as an asset that protects a portfolio from crisis.
- Following the recent decoupling
from the euro, its role as portfolio diversifier has been further
In answer to the question,
why the bank had decided that gold was a liquid asset, his response
was that they had proved that it is - they sold a lot and
bought a lot without any disruption to the market.
Part of the decision to
take gold into the portfolio rests on the fact that the bank
holds 30% of its reserves in non-dollar assets and it therefore
wants to use gold to reduce volatility. It will not go
above that of non-dollar assets percentage because of its
need for dollars for international trade.
The latest figures from
the IMF show that during 2004 Argentina acquired 54.9 tonnes
of gold (equivalent to five days' global fabrication and bar
Now isn't that an eye opener?
Clearly a small country can operate in the gold market to protect
its reserves and reduce volatility. On top of that, as the gold
price rises, so the ability for it to function as a reserve asset
this way, will grow as its liquidity grows, alongside the re-establishment
of the respect for gold.
If Central Banks really want to manage their reserves properly,
as guardians of the nations savings, they will take note of this
example. Right now gold is proving itself in the role it has
always had and acting as protection in a crisis.
So the question we ask Central
Bankers is why are you still selling? Surely if you have it,
it can serve in the same role, particularly for smaller countries.
In the large countries it serves the same role, albeit to a lesser
extent? If there was dealing in gold between the Central Banks
themselves outside the open market, then the same objectives
could be achieved, with willing sellers meeting willing buyers,
or is that not the issue? We suspect that there are other issues,
nothing to do with responsible reserve management.
Either way, we are moving to
a time when Central Banks, despite a Bankers natural dislike
of gold, will be keen to embrace it, if only to retain credibility.
Sep 23, 2005
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Julian D.W. Phillips
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