Introduction to Session 5: Coming Changes in the Indian Bullion Market Kamal Naqvi Metals Analyst, Macquarie Bank The Indian market for gold and silver has become an enormous source of fascination for the western market. One cannot help but notice the huge number of articles by analysts focusing on seasonal buying patterns, Diwali festival purchases, weddings, the extent of monsoon rains, dowry, “good” Hindu dates and so on. The heightened level of interest in India has become evident in many parts of the industry and now gold producers are even willing to spend a considerable amount of money sponsoring dedicated research projects – the latest example being the study undertaken by Grendon International Research & Virtual Metals – to enhance their understanding of the Indian bullion market and how it might develop. Many debates occur outside India regarding the future of the Indian bullion market, analysing the impact of economic and social developments such as growing westernisation, increasing urbanisation, greater literacy, higher incomes, higher female participation in the workforce, and so on. Obviously, within India also there is much debate on what direction the market will take in the future. It is these broader themes and challenges that we look to address in this session. My fascination with the Indian bullion market did not begin because I was desperate to know where the price of gold was going. It originated many years ago as a result of my love of Bollywood films. In the 1980s, my favourite actor was Amitabh Bachan, who I remember as a dashing young police officer, boarding the smuggler’s ship, fighting 50 smugglers single-handedly, rescuing all the “sona ka biscuits” (gold TT bars), delivering the gold to the authorities, marrying the Chief Inspector’s daughter, singing, dancing and living happily ever after. These films began a real enthralment for the grass roots of the bullion market trade. Of course, due to liberalisation the trade has developed significantly to what it is today – basically, a trading and banking dominated market. No longer is Bollywood featuring the bullion market in their films! However, while the modern bullion trade may lack the excitement featured in those Bollywood films, it is at least finally legitimate and much more sustainable as a real source of fascination. The end of the Indian gold rush? tonnes

Indian Gold Demand

800 700

India

% of World Gold Demand 25%

% of world demand

600 500

20%

15%

400 300 200

10%

5%

100 0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

0%

Source: Gold Fields Mineral Services, Macquarie

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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Coming Changes in the Indian Bullion Market

Kamal Naqvi

Virtually everybody attending this forum is aware of the massive acceleration in gold imports that followed the liberalisation measures adopted through the 1990s. Similarly, most are also aware that this trend stalled towards the end of the decade and then fell significantly last year and continues to be very weak in 2003. Have we seen the end of this great Indian gold rush? Was it real or ‘NASDAQ-like’? There was clearly a boom as liberalisation occurred and resulted in a collapse in premia, in turn spurring both domestic, pricesensitive, demand as well as encouraging a raft of new entrants into the market. Are we now seeing a period of consolidation where jewellers that came into the market in the mid to late-1990s are now exiting because they are finding the competition too tough and are up against consolidation within the jewellery market among bigger and financially stronger entities? Perhaps we may be moving on from a largely price-related boom in jewellery to a more stagnant market situation? Hence, the move from some domestic participants towards new areas – such as, direct savings and investment in gold bullion or paper gold, as distinct from via traditional heavy jewellery. Will India remain the world’s largest gold (and silver) jewellery market? 700

tonnes

World Gold Jewellery Consumption

600 500 400 300 200 100

U SA IN D IA

ly U A E Sa E ud gy i A pt ra bi a C hi na

Ita

U Tu K In rke do y ne si a

Si ng

ap M or e al ay Vi sia et n H on am g K G ong er m an y B ra zi M l ex Pa ico ki st an Ja pa Fr n an Th ce ai la nd S K or ea

0

Source: Gold Fields Mineral Services, Macquarie

Will India remain the largest gold and silver jewellery market? It currently dominates gold and silver in terms of global jewellery purchases – even exceeding the US despite having an economy of around onetenth the size. But is this an anomaly? The issue of gold consumption can be looked at in at least two ways, one being on a per capita basis, often used when gold bulls talk of the opportunity in China in particular, whereby a small increase in per capita consumption, multiplied by one billion, would amount to a large number. Alternatively, one can look at income per capita and see that Indians spend far more of their income on gold and silver jewellery than developed nations, which could potentially be a problem for jewellery consumption as Indian consumers become increasingly aligned to western consuming and spending patterns.

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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Coming Changes in the Indian Bullion Market

Kamal Naqvi

Is there potential for India’s gold jewellery demand to rise further? 40

Gold Jewellery Demand Per Capita by Country

35

Gold Demand (grams per capita)

30 25 20 15 10 5

K

SA

U

U

Ita ly E Si gy ng p ap t H on ore g Sa K ud on iA g ra bi a U A E

C

B

hi na ra z Vi et il n Pa am ki st an Ja G pa n er m In an do y ne si M a ex ic o IN M DI A al ay Th sia ai la n Fr d an c Tu e rk e y S K or ea

0

Source: Gold Fields Mineral Services, World Bank, Macquarie

Consider this – it appears that as incomes grow and as the financial markets develop, consumers spend less and less of their income on jewellery. It is, however, far from clear whether this is a linear relationship. All else being equal, jewellery purchases are a function of both total income and the percentage of income spent on jewellery. Hence, the concern is that as Indian incomes grow, the positive impact this would have had on jewellery consumption is reduced or perhaps eliminated (as was the case in Japan) as the percentage of that (higher) income being spent on jewellery reduces.

Will Indians continue to spend as much of their income on gold jewellery? 2.00%

Gold Jewellery Spend (% of income per capita)

1.75% Spend (% of income per capita)

1.50% 1.25% 1.00% 0.75% 0.50% 0.25%

U K Ita M ly e Si xic ng o ap H o n o re g K on g C hi S na K o M rea al ay s Tu ia rk Th ey ai la Vi nd et na Pa m k In ista d n Sa on ud es i A ia ra bi a Eg yp t IN D IA U A E

G

er

Ja pa n m an y Fr an ce U SA B ra zi l

0.00%

Source: Gold Fields Mineral Services, World Bank, Macquarie

On the other hand, we are seeing good growth in terms of India’s jewellery exports. Could India become the world’s dominant exporter of gold jewellery? India is becoming globally dominant in terms of cut diamond production, at least in terms of polishing, perhaps gold, and indeed other forms of jewellery, will become the next fuel for growth, boosting gold imports in the future?

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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Coming Changes in the Indian Bullion Market

Kamal Naqvi

Will India become the dominant exporter of gold jewellery? 60

Indian Gold Jewellery Exports (tonnes, lhs)

10.0

% of Indian Gold Fabrication (rhs)

9.0

50

8.0 7.0

40

6.0 5.0

30

4.0 20

3.0 2.0

10

1.0 0.0

0 1994

1995

1996

1997

1998

1999

2000

2001

Source: Gold Fields Mineral Services, Macquarie

The price sensitivity of the Indian bullion market is widely discussed and well known. The question is how will that develop in the future? What has been the impact of the recent run of higher prices, and what about the collapse in premia? Does that crowd-out participants in the market, and does it mean the only ones left can be large players, i.e. those who can absorb small margins because of large volumes?

How price sensitive is Indian bullion demand? Will Indian premia recover? Gold Price (Rupees/10g)

Silver Price (Rupees/kg)

6,000

9,000

5,500

8,000

5,000

7,000

4,500 6,000

4,000 3,500

5,000

3,000

4,000

2,500

Premium

2,000

Parity Price

Premium 3,000

Parity Price

2,000

1,500 90 91 92 93 94 95 96 97 98 99 00 01 02 03

90 91 92 93 94 95 96 97 98 99 00 01 02 03

Source: EcoWin, CRU International, Bombay Bullion Association, Macquarie

Most market analysts tend to concentrate on the cultural reasons why Indians buy gold, such as for weddings, festivals, and so on. However, often behind these cultural norms is a genuine rationale. There is no doubt that in India gold and silver were actually proper, rational, financial assets for many purchasers, against a background of high rates of inflation and rapid depreciation of the rupee. In an environment where there were few ways to hedge those risks, gold and silver would probably be the only ways in which many private investors around the country could do so. But now those needs are in decline. We have seen a rapid fall off in inflation in India, as we have seen around the world, and we have also seen greater rupee stability over time. This significantly reduces two of the major drivers for demand at least, if not directly at least in terms of the subconscious.

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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Coming Changes in the Indian Bullion Market

Kamal Naqvi

Are currency stability & disinflation reducing the ‘need’ for gold? Rupee/US$ Depreciation (% change y-o-y,lhs) Indian Consumer Price Inflation (%,rhs) 60%

14.00

50%

12.00

40%

10.00

30%

8.00

20%

6.00

10%

4.00

0%

2.00

-10%

0.00 91

92

93

94

95

96

97

98

99

00

01

02

03

Source: EcoWin, Macquarie

The other point that is not often discussed, perhaps because people do not want to recognise it too publicly, is the importance of the unofficial economy or the black market on the Indian bullion market. We are no long meaning here the smuggling trade which has thankfully greatly reduced over recent years. We are focussing here on the sheer size of the black economy in India and recognising it as a major reason for such a high level of gold demand, and to a lesser degree, silver demand. In developed economies, as the chart depicts below, there is a much higher percentage of tax revenue accruing as a percentage of GDP than that recorded for India. Hiding wealth is an extremely important, if unquantifiable, driver for what appears to be “excessive” levels of bullion demand. Will it continue in the future? Certainly it is not something that the trade would necessarily want to promote, but the black market or hidden wealth remains a fact of life in India and it is hard to see this changing markedly in the near term. How important is the “unofficial” economy to gold demand? 40.0%

Tax Revenue (as % of GDP)

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0%

U K

Ita ly Fr an ce

an y

U SA

m

er G

C hi na IN D IA Pa ki st an M ex ic o Ja pa n Th ai la In nd do ne si a Vi et na Si ng m ap or e Eg yp t S K or ea M al ay si a B ra z Tu il rk ey

0.0%

Source: World Bank, Macquarie

How about the much discussed wedding demand for gold? Will wedding gifts be forever dominated by gold? In places like the UK, for example, where there is a huge Asian population, there are a large number of Indian jewellery stores servicing local wedding demand. This seems to suggest that westernisation does not mean that Indians necessarily move away from gold. That said, it is also the case that UK-based Asians tend to buy noticeably less gold for weddings than their cousins living in India. Indian wedding gifts in the UK have a far higher proportion of money, household appliances and so on than would be seen at weddings in India. Perhaps this is a pointer for the future, at least in urban areas.

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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Coming Changes in the Indian Bullion Market

Kamal Naqvi

And, finally, what about fashion? There is already a noticeable move in urban India away from wearing heavy gold jewellery by the younger generation, largely due to the influence of western fashion trends. A quick look at India’s MTV is indicative of the westernisation that is occurring with virtually no presenter ever wearing any gold at all. Westernisation generally appears to be a threat to gold jewellery demand in India, even if only in the urban centres. I look forward to listening to the rest of the speakers in this session to discuss the various changes that they see occurring in India in the short, medium and long term. ■ Is this …the future?

Source: National Geographic, Macquarie

The LBMA Indian Bullion Market Forum – New Delhi, 30-31 January 2003

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