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The Misleading Rupee
The Indian
gold investor still has one weakness -his understanding of the Rupee itself
in pricing gold. As we are all guilty of, the Indian investor measures the
price of gold in the Rupee and rarely measures the price of the Rupee in
terms of gold. Consequently as the Rupee weakens, he sees the price of gold
rising, when it is not. That's the case in today's market. In the past the
Rupee has been as strong as Rs.30 :$1. Last year it
was Rs.42 whereas today it's at Rs.55.81. To illustrate; let's take a gold price of $1,500. At Rs.30: $1 it is Rs.45,000 per ounce. At Rs.42: $1 it is Rs.63,000.
At Rs.55.81: $1 it is Rs.83,715.
This is
fooling the present Indian market into believing the gold price is 'spiking',
whereas in the dollar it's 16.5% off its high! Until Indians understand the
function of the Rupee in pricing, they'll be fooled by it. At the moment they
are standing back from the gold market waiting for prices to fall and even
selling gold in the hope to buy back cheaper. We doubt whether the Rupee will
strengthen for a long time to come.
Disposable Income a Restraint
Just as in
other parts of the world, the one limiting factor on gold buying is
disposable income. Because he's buying as saving, he'll buy anyway. As the
price rises, the volume of gold, which his
disposable income will buy, gets smaller. Therefore, Indian demand for gold
will be driven -as was the last decade-- by savings and real income levels
and not by price. Remember he was buying when gold was $35 an ounce, $100 an
ounce $300 an ounce and now when gold is $1,600 an ounce he is still buying.
Furthermore, history has confirmed by these rising prices that he was right.
Some see it as a blessing from Ganesha, who we have
heard, does not rely on Technical Analysis.
India's
demand for the precious metal is estimated to fall by 4% in volume and rise
4% in value in 2012, according to Morgan Stanley. Respondents from several households
said they expect gold prices to rise by 8% in 2012; however, an additional 8%
to 10% rise would lead to a proportionate decline in volumes.
Indian
households are increasing their demand for gold bars and coins. Morgan
Stanley notes rising income is behind the growing share of gold bar holdings.
Buying gold
as a backup for bad times accounted for 16% of those surveyed, while gifting
on events was another 15%. When speaking about the reasons why they bought
gold jewelry in the past 12 months, respondents said auspicious events like
marriages and festival accounted for 35%, while investment demand accounted
for 20%. Around 8% of those surveyed said they bought gold as an impulse buy
or bought gold for no specific reason. Another 6% of those surveyed said they
bought gold because they were fond of the precious metal.
From Rural to Urban, from Seasonality to Less Seasonality
The rural
agricultural sector, which accounts for 70% of the population, has been in
the past the source of 2/3 of gold demand -this brought a sense of
seasonality to the gold markets
Indian gold
buying starts its year in mid-to-late August and carries on through until May
of the next year. At the beginning of June, farmers must ensure crops are in
the ground and ready for the annual monsoons, or tropical rains. So far, this
year bodes well for a good monsoon. Harvesting takes place through August,
which is when the farmers get their annual paychecks.
India is now
experiencing the rapid growth of the Middle class and urbanization. This
movement has quickened its pace in the last ten years to the extent that the
U.N. believes that 41% of India's total population will be living in towns and
cities by 2030--up from the current level of 30%. More importantly, a good
proportion of these will join the middle classes.
Mckinsey reports, in 2010 there were 40 million consuming
households in India with an annual income of more than U.S.$7,000.
This figure is set to more than double to 94 million by 2020. The impact will
be significant for gold, losing its seasonality and becoming a feature all
year round.
The peak
period for gold demand will continue to be from end-August through to end
May, as the rural sector joins the new middle classes in buying gold and
boosting demand to record highs, but will not fall away as it did in the past
because of the famer's timetable. Morgan Stanly expects volume demand to drop
13% for urban India and rise 4% for rural India this year.
With regards
to the drivers of gold purchases, Morgan Stanly adds that so-called 'life
events' were responsible for around 45% of gold purchases by urban households
in 2010, while discretionary consumption was around 25% and investment as a
driver accounted for another 30%. In 2011, life events as a driver for
purchase came down to 35%, and investment rocketed to around 40%.
Discretionary consumption was the other 25%.
Morgan Stanly
notes that Indian households are increasingly channeling their investment
demand through bars or coins. The report projects a 2% to 3% point increase
in share of bars and coins this year. The World Gold Council has said bars
and coins represented 39% of total investment in 2011, a record high.
There are
huge volumes of gold and silver bought over the last few decades there, so
why doesn't it leave the homes in which it is kept and travel to the market?
Why don't merchants then take it in at the prices they offer, parcel it up
and ship it to the international markets to get the apparent profit? This is
not the way Indian think. Only a small amount of gold or silver is exported
from India, usually in the form of jewelry and sold to Indian expatriates
overseas, particularly into the Middle East.
However,
should the need arise for them to sell their gold and silver, they approach
their dealer. When he buys, he has to report the transaction
"officially" and pay purchase tax, which is enormous relative to
his profits. He also would have to expose his complete business to the
authorities, whose reputation for administering businesses is appallingly
corrupt. Should he then want to export this purchased metal, he needs to
reflect the metal in his accounts and confirm purchase tax has been paid.
With a similar aversion to tax as one has to the plague, dealers buy such
scrap for cash and hoard it in their own private, invisible stores.
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