A new gold rush

Nothing exemplifies the growing lustre of gold as much as its current bull rush in the market. On Dhanteras day, for example, harried customers heckled each other as they queued up for hours to gain entry into Tanishq's outlet in south Delhi, waiting to buy jewellery.

Executives in the retail store recorded an astounding 3,000 footfalls on that day alone, virtually double the numbers the previous year. Sales that day were an all-time high record of Rs 1.75 crore.

Nor was the rush limited to Delhi alone. Tanishq's Bangalore headquarters has posted the startling countrywide sales for this day at over Rs 26 crore, up by over 30 per cent from last year.

The yellow metal is an attractive investment once again, thanks to the steep rise in gold prices (due to the weakening dollar) and the increasing availability of institutionalised ways to buy and sell gold. The gold rush is reflected in the country's two commodity exchanges, Multi Commodity Exchange (MCX) and National Commodities and Derivatives Exchange of India (NCDX), where futures trading in gold began a year ago.

Volumes have since increased dramatically from a mere 100 kg in gold to the current over 10,000 kg a day. Says Joseph Massey, deputy managing director in MCX: "Both gold and silver are currently among the most liquid commodities in the futures market."

Hyderabad-based Karvy Commodities Broking Pvt Ltd, which manages retail investors who trade in commodities, says that as much as 70 per cent of the trading volumes of its clients is in gold and silver.

Banks too have jumped on the gold bandwagon. Corporation Bank and Indian Bank have started offering loans to customers to buy gold on easy EMIs. ICICI Bank is hawking gold coins in the retail segment as an attractive investment tool; it hopes to nearly double its sales to 2 tonnes by the end of this financial year, hitting the Rs 140-crore mark.

Says Anup Bagchi, general manager retail liabiltities, ICICI Bank: "The huge increase in demand is because consumers now have a branded, quality product with ensured purity."

ICICI Bank sells its gold in small denominations of 5-10 gm coins, making it easy for even small investors to park their money in gold. Tanishq, a division of the Tata-controlled Titan Industries, has seen a 100 per cent increase in its sale of gold coins this year over last year.

The company hopes to sell coins alone worth Rs 30 crore. And Harish Bhat, chief operating officer, jewellery division, Titan Industries, says he expects to end the year with a 45 per cent increase in sales of gold jewellery.

There are many others who are indirectly cashing in on the gold boom. Delhi's Gold Souk, the country's first jewellery mall in Gurgaon, is experiencing amazing footfalls of 2,500 customers on average over weekends.

Says G S Pillai, president, Gold Souk: "That is a huge number, considering that the conversion rate of footfalls into sales is almost 100 per cent."

No wonder Gold Souk is on overdrive. It has already sold almost 60 per cent of its 1.1 lakh sq ft space in the jewellery mall, and is now working on setting up nine similar malls across the country at an investment of under Rs 400 crore. Talks are also on with commodity exchanges to use the premises for trading in gold and silver.

At a macro level too, the numbers clearly show phenemonal demand for gold in India this year. The World Gold Council (WGC) estimates that consumer demand for gold between July-September this year went up by 28 per cent in rupee terms and 16 per cent in tonnage terms over the previous year. Compare that with a mere 3 per cent growth in 2003 over the previous year in tonnage terms and the hunger for gold becomes evident.

More importantly, Rajan Venkatesh, director India of bullion in Nova Scotia Bank, says: "The peak season for buying gold lasts from October to March," indicating the trend is likely to contnue well into the new year.

Interestingly too, the offtake of gold for purposes of investment (in bars, coins etc) has been growing faster than jewellery. Between January and September, gold offtake in rupee terms went up by 21.6 per cent as compared to 19.9 per cent for jewellery.

Trends in previous years indicate that it was jewellery that enjoyed an edge over bullion. That trend has been reversed this year. Last year, gold for investment peaked at 90 tonnes but WGC estimates that it would clear the 100-tonne mark, which constitutes about a fifth of all gold imported to India.

There are sound reasons for the new lease of life that gold is enjoying. Suggests WGC managing director Sanjiv Aggarwal: "The rise in gold prices, the fear of potenial inflation fuelled by oil prices (gold is a good hedge) and the need to diversify risks, especially their exposures in bonds and shares, and an overall strong economic growth has prompted the demand for gold this year in India."

Gold prices skyrocketed this Thursday hitting $456.75 after remaining stable at around $450-455 the last few days. Analysts say a correction could be in the offing despite the massive current deficit in the US, after which it will again be on the upswing. Similarly, in India gold prices have shot up by nearly 17 per cent from around Rs 5,675 in mid-May to over Rs 6,635 for 10 gm on Thursday.

From another plane, absolute return on gold based on closing prices in the NCDX for a six-month period ending November 20 was as high as 13.68 per cent "" surely more attractive than many other investment instruments.

Elaborates V Sivaramakrishnan, an analyst in Karvy Commodities: "In the past six months the returns have been about 14 per cent; on an annualised basis this means 30 per cent. That is as attractive as the stock market."

Experts expect the prices to firm up further. Says Mumbai based bullion consultant Bhargava Vaidya: "In the short term, over the next four months, gold could trade at $415-450 but could touch $500 later "" depending on the political and economic situation in West Asia."

Avers Krishna Nathani, head research in Indiabullion.com: "One should wait for gold to get back to $430 levels where people could once again begin investments. This would help in sustaining the rally." He suggests that up to 30 per cent of one's portfolio could be invested in gold and silver.

Apart from the upside, buying and selling of gold is becoming easier as the gold market gets increasingly more institutionalised support. Corporation Bank, for instance, has floated a "Corp Mahila Gold" scheme that allows individuals loans to buy jewellery up to Rs 50,000 with no alternate security payable in EMIs at interest rates ranging from 10-12.25 per cent.

Says a senior executive of the bank: "We hope to grow this scheme in a big way but are initially looking at a small target of Rs 10 crore this year. Our main target is to attract the salaried working women."

Tanishq has a "Gold Harvest Scheme" under which customers can make a monthly deposit of Rs 500 for 12-18 months (you get Rs 6,300 back on a 12-month deposit). The company pays out between 7-9 per cent interest on the deposit as bonus but the money has to be used for buying jewellery or gold in its stores." Says Bhat, "We have already enrolled over 30,000 depositors under the scheme."

Commodity exchanges are also making it easier for small retail investors to trade in gold. Both exchanges offer a 100 gm contract (apart from 1 kilo) for trading.

NCDX chief business officer Narendra Gupta points out: "The 100 gm contract is safer for retail investors who genuinely hedge the prices, and are allowed to make smaller investments by just paying the margin of 5 per cent of the total value (a 100-gm bar would cost Rs 66,000 currently).

Karvy's Sivaramakrishnan adds that this is the key reason that makes futures in gold more attractive than investing in the stock exchange. "Compare this to the stock market were margins could go up to 25 per cent depending on the company. So the risks as well as the upfront cash required is more," he says.

More importantly, buying gold with authenticated purity levels is no longer a Herculean task. ICICI Bank, for instance, sells gold coins with 99.9 per cent purity (the highest purity for gold).

In order to provide liquidity to coin buyers, the bank is now working on a scheme by which it will offer loans against the gold coins. Also, to make gold purchases for investment more popular, the bank recently introduced a one-gm gold pack. Bagchi says it was targeted essentially at smaller towns.

If gold is winning back its glitter, it is also because agencies like WGC are aggressively promoting its popularity in the marketplace. Aggarwal says research shows that Indian women always need an occasion to buy gold. WGC is working on creating and promoting more such occasions apart from the usual Dhanteras, for instance.

This year, the council has already created a special campaign and organised jewellery festivals to woo customers to buy gold during Akhtirth, a religious occasion in south India.

The result: as much as 12 tonnes of gold was bought during the festival week in that region. It has virtually doubled the number of shopping festivals that it organised for jewellery this year and is aggressively promoting its "Speak Gold" advertising campaign.

Yet, many hold a contrarian view. Mumbai-based broker Sunil Dholakia says only 5 per cent of his 3,500 clients trade in gold. "I don't see anyone moving his money from the stock market to gold unless things go really bad. Trading in gold is too complicated to attract attention," he claims.

Dholakia also says that jewellers who indulge in cash transactions and make money mixing gold find no need to play the futures market.

Also, fancy schemes to draw out gold locked away in homes have failed. For instance, several banks (like State Bank of India) started the gold deposit scheme (under which you were paid interest for depositing your jewellery with the bank) but it has not taken off.

Says a senior banking official of one of the banks which run the scheme: "It is a failure as depositors are reluctant to part with their gold which is not returned to them as jewellery but in a gold bar. Another issue is that we cannot assess the gold quality."

Vaidya points out that with the rupee appreciating vis-a-vis the dollar, the actual gains on gold are going down in the local market as India is a net importer of gold.

"Fresh investments in gold can be made if the rupee levels are defended by the RBI to arrest the appreciation," he points out.

Avers a senior executive of MMTC: "Gold sales have dampened because of the high price." Even WGC admits that demand in November and December might slow down due to high prices "" though overall growth will not be affected.

But with most analysts of the view that gold prices will only move higher over the next few months (after a small correction), the shine of the yellow metal on the minds of the Indian customers does not seem to be fading "" at least for now.

Reasons for the shine

India is dependent on imports for most of its gold, therefore fluctuations in the international prices have a direct bearing on gold prices in India.

The current bull run in gold prices is a result of the weakening dollar. Typically, when the dollar falls in value relative to other currencies "" as is happening now "" dollar-denominated stocks and bonds tend to lose value for foreign investors. They have no alternative but to take recourse to buying gold.

Says Sanjiv Aggarwal of WGC : "With the dollar weakening, no alternative currency has substituted the dollar. Gold is therefore seen as an effective option."

Secondly, there is a direct relationship between the hike in oil prices and gold prices. With inflationary pressures due to the oil price hike, gold becomes an effective hedge against inflation.

More importantly, gold supplies are under strain. Overall supply of gold in the market was sharply reduced in July-September by 22 per cent over last year in the same period.

That is because mine production fell due to landsides in Indonesian mines, the selling of gold by central banks all over the world was much lower than in 2003, and South African mines opted for de-hedging. Simply put, that means they are not getting into contracts with suppliers to sell gold in the future, and that is affecting supply sentiments.