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The Great Indian Gold Rush

Nikhil Faleiro in Bombay

While the rest of the world is bemoaning the fading allure of the precious yellow metal, India has emerged as the buying field. Demand for gold in India has been rising in recent months.

Ever since the Bank of England had decided to offload a huge quantity of its gold reserves, a downward price spiral has set in global markets.

But in India, in an environment of fluctuating stock markets, political uncertainty and speculation, gold has become a favourite of the middle and upper class Indian consumer.

Analysts say one reason for the Great Indian Gold Rush could be that the Gold Bond Scheme is about to take off.

According to the World Gold Council, demand for gold in India for the second quarter or Q2 of 1999-2000 was six per cent higher than the level recorded for the same period last year.

Rolf Schneebeli, CEO, the WGC, says, ``The demand in Q2 of 1999 was 218.4 tonnes while the demand in Q2 of 1998 was 206.8 tonnes. The economic recovery and high rural incomes are the key factors that led to the revival of demand.''

According to the Gold Demand Trends, a report released by the World Gold Council, good 1998-99 performance by the agricultural sector had a very positive impact on incomes in the rural areas and that contributed to the rise in demand.

The report states that last year, low inflation reduced the prices of basic household goods, a major factor that kept spenders away from gold. Discounting the global talk about falling demand for gold, Schneebeli says, "The strong performance in the second quarter was due to a 32 per cent increase in investment over the same period last year and a gain of 13 per cent in worldwide jewellery demand. Broader appreciation for the role of gold as a monetary asset brought strong gains in the demand for gold as an investment.''

Another factor that has suddenly led to the spurt in gold demand has been the slew of incentives announced by Finance Minister Yashwant Sinha during the 1999 Budget. With India reportedly importing more gold than oil, it was not surprising that the government announced an initiative for launching another Gold Deposit Scheme this year.

The idea behind this scheme is to mobilise idle gold and channel it as a productive saving and at the same time reduce dependence on imported gold.

Under this scheme, selected banks will be permitted to accept gold deposits and in turn issue interest bearing certificates or bonds. On maturity, these can be reclaimed in gold or cash.

With the government expected to garner Rs 50 billion and with the anticipation that the Reserve Bank of India may announce an interest of 2.5 to 3.5 per cent on the gold deposits, it is not surprising that people are rushing to buy gold in large quantities.

M Damani, president of the Bombay Bullion Association, says, ``People buy what they consider is or will be 'hot'. Soon, the yellow metal will be 'very hot'.'' And combined with the prices of gold reaching an all-time low of Rs 4,070 per 100 grams, it is not surprising that people are rushing to pick up the metal.

State Bank of India is already putting in place the infrastructure and systems for the gold bond scheme. It is only a matter of time before gold certificates are issued to the customer. Having identified 50 such centres for gold deposits -- majority of them are in Kerala, Tamil Nadu, Karnataka and Andhra Pradesh -- SBI is hopeful of meeting the target set by the government.

According to a senior SBI official, the reason for targeting South India is the region's numerous temples and trusts, the bank's main targets. Moreover, there is a rich culture of gold investments in southern households. P Awasthi, deputy general manager, SBI, says, ``The purpose is to make an unproductive asset productive and we are confident this scheme will work out.''

With India being the largest consumer of gold (613.7 tonnes in 1998), bankers and other financial organisations are eagerly awaiting the launch of the gold bond scheme. The state run banks are hoping to mobilise 100 tonnes in the first 12 months once the deposit scheme takes off. Eight other nominated banks -- SBI, Bank of India, Corporate Bank, Indian Overseas Bank, Allahabad Bank, Canara Bank, Bank of Nova Scotia and Standard Chartered Bank -- have been permitted to accept gold deposits and issue interest bearing certificates.

Jayakar Shetty, general manager, Corporation Bank, says, ``With gold forming the core of any investment portfolio in India, there are many who will be willing to earn that extra interest on the metal. So we are confident that the scheme will succeed.''

As the bearish trend for gold continues worldwide, analysts are hopeful that this trend will spill over to other sectors of the economies. Howard Knight, executive director of investment bank Warburg Dillon Read, says, ``Gold is always used as the prefect hedge in an economic crisis and a store of value. When things are bad, gold is sold, when the sun shines, gold is bought.''

As demand for gold continues to rise, analysts feel the Indian economy's recovery is finally real and happening.

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