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Gold: High But Still Mighty

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16 Solitaire iNterNatioNal l november 2009

After a lengthy period where sales stagnated and many wondered whether the yellow metal’s love affair with the Indian consumer was in trouble, gold has made an emphatic comeback as the material of choice for the Indian consumer. Shanoo Bijlani and Regan Luis report on gold’s surprisingly strong showing over the all-important festival sales period.

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I t had been apparent for some time now that India had long since shaken off any effects of the global slowdown that might have affected it and got back on the path to economic growth, with consumers endorsing this view fairly emphatically in the way they spent on goods and services. But the Indian jewellery industry was, nonetheless, nervous as it approached its single largest sales period of the year – the Diwali festival week. Unlike their counterparts in developed markets, it wasn’t the economy or consumer sentiment that worried them. What gave them sleepless nights was the high and extremely volatile price of gold.

Most industry watchers gave the Diwali week a fifty-fifty chance of either scoring a convincing “win”, or coming apart at the seams depending on whether the price of gold stayed steady at around the Rs.16,000 ($340) per 10 gm mark or oscillated wildly or, as most expected, shot up sharply. The Diwali festival period covers gold-buying occasions like Pushya Nakshatra, Dhanteras, Bestu Varas (New Year’s Day in the Hindu calendar) and Bhau Beej. As it turned

out, the price of gold stayed relatively steady over the festival week and sales of bullion and gold jewellery reached record levels. Shortly after the festival week, the Indian government also publicly declared its preference for the yellow metal over the falling US greenback as its choice of foreign exchange holding medium (see box).

The producer-funded World Gold Council (WGC) said gold sales during the Diwali week (October 12 to 19) this year grew by 5.7 per cent in volume terms to 56 tonnes, and rose by 39.2 per cent to Rs.8,904 crore ($1.9 billion) in value, compared with the same period in 2008. These figures are based on a survey of 120 jewellery retailers that participated in the WGC’s pan India gold festival called The Great Indian Gold Rush, which offered buyers gold prizes in various denominations. The WGC claimed this initiative was instrumental in pushing sales of gold over the festival period. “This shopping festival has been instrumental in the growth of gold sales this year as retailers have received an overwhelming response from the consumers,” it said in a statement.

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This festive season has proved to be very positive for gold sales as compared to last year. The Great Indian Gold Rush has further given consumers a bigger opportunity to indulge in gold

The WGC released the following region-wise gold sales figures for the 2009 Diwali festival period:

Region In Tonnes In Rs. Crore In USD ($) MnWest 19.6 3,116.40 662.9

North 16.8 2,671.20 568.2South 11.2 1,780.80 378.5East 8.4 1,335.60 283.8

Ajay Mitra, WGC Managing Director for the Indian Subcontinent, said, “This festive season has proved to be very positive for gold sales as compared to last year. The Great Indian Gold Rush has further given consumers a bigger opportunity to indulge in gold, which is reflected by the strong customer response received from the retailers. This increase in demand can

be attributed to consumers’ belief that gold is the only safe investment in the current global market scenario. Based on the existing consumer reaction to gold, we are confident that the current trend will continue for the rest of the year.”

In the run-up to the Diwali festival celebrations, many retailers admitted to having experienced nail-biting moments. Even as the recessionary

Source: World Gold Council

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clouds had just begun to lift, gold prices surged to what was then an all time high of Rs.16,000 ($340). There was a big question mark in retailers’ mind: Will consumers come to stores to buy jewellery?

But retailers were in for a real surprise. About 13 tonnes of gold was sold across the country on Dhanteras this year. The day is considered auspicious and therefore traditionally a driver of high gold sales. This year’s sales performance marked a 36 per cent increase over last year.

Kumar Jain, proprietor of Umedmal Tilokchand Zaveri (U.T. Zaveri) and vice president of the Mumbai Jewellers’ Association, recalls: “Last Dhanteras, the global recession had manifested itself and cast a shadow over the festival week. Even so, we managed to keep our three showrooms open till 11.30 pm every day. This year, because of the high gold prices, we thought we would pack up early every day, but to our surprise, we did business till 1.30 am daily during the main festival days.”

Despite the fact that gold prices had surged to a new high, jewellery and bullion sales were robust this year. “High gold prices did not dent or curb consumer appetite for the yellow metal. Footfalls in our showroom increased 30 per cent that week. And we’re bullish about gold sales over the upcoming wedding season as well,” says Pradeep Kothari of Karan Kothari Jewellers, Nagpur.

Stable Rates, High SalesAs has been the case for literally

thousands of years in India, the investment motive was a strong determiner of consumer buying over the festival period. Notwithstanding the fact that prices were high, what

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got consumers buying gold was the fact that those

high prices remained relatively stable. “Stability in gold prices is very important as this assures the

consumer, who then begins to accept whatever the price is as the new floor price for the yellow

metal. It also takes away the problem of whether to buy now or hold on for

better prices,” Kumar Jain notes. He goes on to say: “Gold

delivers good returns and so it has elbowed its way back into the bouquet

of investment options for consumers. The metal is now seen as one of the most dependable investment instruments among the diverse options available today. Further, gold’s fundamentals are strong and the metal’s prices are insulated against the price vagaries of stocks, commodities and realty.” This is confirmed by others who note that the value of the US dollar and the price of oil are the two biggest determining factors of the price of gold.

In fact, despite all the hoopla about the modern equities markets and other more sophisticated investment instruments, gold has steadily rewarded those who have invested in it. The accompanying table gives one a clear picture of how gold has performed in India as an investment over the past five years.

Analysts also credited media predictions of the price of gold going through Rs.18,000 ($382) as having provided an incentive for sales of the yellow metal over the festival period. Staying relatively close to Rs.16,000 ($340), gold was, they say, seen as a good investment as predicted higher prices were taken as almost guaranteed in the future.

Sold out!This perception of gold being a

“good buy” at Rs.16,000 ($340) also led to much advance jewellery buying for the upcoming wedding season as well. But while they took advantage of what they perceived as good prices, consumers weren’t necessarily willing to simply splurge on the yellow metal. A lot of lightweight jewellery that simply looked more expensive, was picked up for the coming wedding season. Suvankar Sen, executive director of Kolkata-based Senco Jewellers, which has 25 retail outlets in eastern India, says, “Dhanteras saw increased footfalls. Over the festive period, we witnessed a growth of up to 40 per cent in terms of value, and registered a marginal growth of about 10 per cent in volume. Still, sales surpassed our expectations.

“People came into showrooms in ‘buying mode’, but with a fixed budget. We saw a lot of buying in the bridal segment. About 65 per cent of our customers bought lightweight bridal jewellery that looked big and heavy, while about 35 per cent purchased heavy sets.”

Kothari of Nagpur reveals that his firm sold lightweight jewellery of between 2- and 30 grams and heavy bridal jewellery weighing from 100 to 200 grams. “We received a good response from the mid- and lower-

Price of 10 grams of 24k gold on Mar 31st

2005 Rs.7,0002006 Rs.8,4002007 Rs.10,8002008 Rs.12,5002009 Rs.16,500

Source: U.T. Zaveri

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indian treasury Unloads Dollar reserves For Gold

In a move that it downplayed publicly, the Reserve Bank of India (RBI), the country’s central bank, recently bought 200 tonnes of gold from the International Monetary Fund (IMF) for $6.7 billion. Observers were quick to point out that the move was motivated by the Indian treasury’s growing uncertainty about the US dollar. India simply exchanged some of its US dollar foreign exchange reserves that were perceived as being sure to lose value as the greenback depreciated in value, for a stash of gold that is viewed as being almost certain to appreciate.

The Indian purchase represents almost half the total sales volume of 403.3 tonnes approved by the IMF in September for sale this year. Gold now accounts for slightly over 6 per cent of India’s $286 billion foreign exchange reserves, from 3.6 per cent prior to the acquisition.

The transaction caused the price of gold to skyrocket to an all-time high of $1,086.10 per troy ounce in the international market, and experts think other central banks may also follow suit. Analysts told the Financial Times that India’s move matches similar actions by China, which has almost doubled its gold reserves since 2003.

This signals that the two major Asian economies are no longer keen to hold reserves in US currency, they added.

World Gold Council chief executive officer Aram Shishmanian said: “Gold always plays an important role as a protector of wealth, and in these current times of financial instability, that role has taken on a newfound prominence. The fact that these sales will effectively rescue the IMF from a difficult situation regarding its own finances is proof of gold’s unique investment characteristics, long-recognised by central bankers and institutional and individual investors alike.

segment buyers, and they were certainly not affected by the Rs.16,000-plus price of gold. I am expecting good sales throughout the marriage season, which ends early next year,” says a hopeful Kothari.

Jain of U.T. Zaveri also saw strong demand for bridal jewellery, consisting of necklace sets and other ornaments like cummerbunds and armlets, for the upcoming wedding season. “They bought anywhere between 150- and 250 grams in light sets and 800- and 1,500 grams of heavy bridal sets,” he notes.

Alok Sen, chief operating officer, Takshh Jewellers, New Delhi, says, “Our sales expectations for October were more than fulfilled in terms of both value and volume. Plain gold sales constituted 60 per cent of our business, while diamond jewellery made up 40 per cent. We sold well across all categories, but the main items that moved were the average bread-and-butter categories. Jewellery costing more than Rs.500,000 ($10,625) did not move that well.”

Takshh Jewellers, which opened its doors in April this year, attributes its strong performance to the right kind of stock and its hallmarked and certified jewellery, which was priced competitively. Sen says that the WGC festival helped to increase the number of walk-ins. “In fact, 10 of our customers won gold prizes ranging from 250 grams downwards,” he adds.

Nitin Khandelwal, proprietor of Khandelwal Jewellers, Akola, who has two large showrooms, says his firm did fantastic business and exceeded its sales expectation by almost 25 per cent. “The WGC festival too helped us achieve part of our target. However, the sales momentum after Diwali has slowed down a bit. Wedding sales are not picking up, probably because buyers may have already purchased for the forthcoming wedding season,” he remarks.

Bullish on Bullion Sales of coins and bars were driven by strong

investment demand over the festival period. Khandelwal of Akola states that coin and bars constituted nearly half of his sales this season, while Kothari of Nagpur saw investment-only related purchases go up by 30 per cent.

“Coins will be the mainstay of the gold business in future,” states Vikram Khanna of Khanna Jewellers, New Delhi, emphatically. “Coins and medallion sales are getting more robust every single day. There are

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many people getting into this business, including banks. While coins and bars don’t have high margins like jewellery, retailers benefit as there is no extra investment or labour charges involved.”

Suvankar Sen says, “Gold is back on the consumers’ radar as an asset that can be relied upon. Consumers became unsure about its investment potential when it began its rollercoaster ride from Rs.10,000 to Rs.15,000 ($212 to $319) per 10 gms. They waited for a correction in prices. After this recent period of relative stability in gold prices, consumers now view the metal differently.”

“Gold is definitely a good investment vehicle. Keep aside a little bit of your savings for gold. The metal will appreciate in the long run,” Kumar Jain advises.

In India, known for its millennia-old love story with the yellow metal, gold is king again with the consumer.