gold:report
The Role of Gold in India
By Natalie Dempster, Investment Research Manager, World Gold Council
India is the world’s largest gold market in
volume terms, one that has expanded
considerably during its period of liberali-
sation. This report provides a broad
overview of the gold market within the
context of India’s new super-charged
economy. It looks at all the major aspects
of demand and supply, including how the
jewellery sector is being affected by the
current social and economic changes,
new ways to invest in gold, the role of
the Reserve Bank of India and on the
supply-side, mine production and the
scrap market.
Market size: A league of its own
India is the world’s largest consumer of
gold in tonnage terms. In 2005, India
accounted for 22% of global gold
jewellery demand and 35% of all net retail
investment (coins and bars).
demand has grown at an average annual
rate of 10% since the repeal of the Gold
Control Act in 1990, which had forbidden
the holding of gold in bar form1. Although
estimates vary, India is now thought to
hold close to 15,000 tonnes or 10% of the
world’s entire above-ground gold stocks.
1
For a full discussion on the de-regulation of the Indian gold market see: Deregulation of Gold in India. Himadri Bhattacharya, World Gold Council, March 2003.
SEPTEMBER 2006
Sales have averaged 676 tonnes per is especially impressive when juxtaposed
annum over the past decade, which is against the price, which has risen almost
one and a half times more than in the continuously in rupee terms over the
United States, the world’s second largest same period (Figure 2). Likewise in 2005,
gold market in volume terms (it is the despite a 6% rise in the gold price in
largest in value terms), and between rupee terms, gold consumption rose to
three and eight times more than in China, 750 tonnes from 639 tonnes the previous
Turkey, Saudi Arabia and the United Arab year, with growth in each category (jew-
Emirates, the world’s other main gold- ellery, coins and bars, medallions and
consuming countries (Figure 1). The imitation coins, electronics and other
strength of demand over the past decade industrial and decorative uses).
Figure 1: Annual Demand1 for Gold (tonnes) 10 year average, 1996-2005
800
700
600
500
400
Gold
300
200
100
0
India United States China Turkey Saudi Arabia UAE
1 Jewellery, coins and bars, medallions and imitation coins, industrial and decorartive uses
Source: GFMS Ltd.
1
gold:report
Figure 2: Indian Gold Demand1 (tonnes) and Price (Rupee)
900
800
700
600
500
400
300
200
100
0 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Tonnes LHS Price (Rupee) RHS
1
Jewellery, coins and bars, medallions and imitation coins, industrial and decorartive uses
Source: GFMS Ltd., Global Insight
The origins of gold demand is depicted as a beautiful woman of gold-
Indian gold demand is firmly embedded en complexion, dressed in gold-embroi-
in cultural and religious traditions. The dered red clothes, with gold coins
country has one of the most deeply reli- flowing from her hands. Since it is sug-
gious societies in the world, the most gested that those who worship her gain
widespread faith being Hinduism, which wealth, Hindus consider gold an auspi-
is practiced by around 80% of the popu- cious metal, which they like to buy or gift
lation. Gold is seen as a symbol of wealth during religious festivals. The most
and prosperity in the Hindu religion. The important of these is Diwali, which marks
goddess Lakshmi, who symbolises fertil- the beginning of the Hindu New Year and
ity, productiveness and prosperity, is said usually takes place in October or
to have been bathed by elephants who November.
carried pure water in golden vessels. She Akshaya Thrithiya, falling in April or May,
has also become an important day to
buy gold. Purchases on this day are
considered auspicious (it is the third
most auspicious day in the Hindu calen-
dar). The association between gold and
“auspiciousness” has been used in
recent years to promote the idea of buy-
ing gold. Over the past five years,
Akshaya Thrithiya has become a major
gold-buying occasion in the South of
India, especially in the State of Tamil
Nadu, where sales have reached record
levels. Since 2005, the idea has been
promoted across the North and West of
the country, which has also resulted in a
SEPTEMBER 2006 2
w w w. g o l d . o rg
significant rise in gold sales in these
25000 regions.
Gold also plays an important role in the
20000 marriage ceremony, where brides are
often adorned from head to toe in gold
15000 jewellery. Most of this will be a gift from
her parents as a way of giving her some
10000 inheritance, as Hindu tradition dictates
that the family’s assets are only passed
down to sons. The gold (and other gifts)
5000
the bride receives or her “Streedhan”
(“Stree” meaning woman and “dhan”
2004 2005
meaning wealth) mean her parents can
make sure she is financially secure and
enjoys at least the same standard of liv-
ing to which she was accustomed in her
childhood. Gold is especially important in
this respect as it remains directly under
her control, whereas she may not be
privy to the family’s other financial affairs.
With an estimated 10 million marriages a
year taking place in India, wedding-relat-
ed demand is big business. Much of this
demand takes place in the wedding sea-
son, which falls between October and
January, and April and May, though a
good many purchases will be made well
in advance of the wedding. Indeed, it is
customary for the parents of a baby girl
to start accumulating gold for this pur-
pose soon after the child is born.
Not all gold demand is allied with cultur-
al and religious beliefs. Gold is also
viewed as a secure and easily accessible
savings vehicle by the rural community,
where around 70% of the population
lives. Gold has the added virtue of being
an inflation hedge. An investor who had
bought gold in 1970, for example, would
have been more than protected against
inflation (Figure 3). Gold is also one of
the limited ways in which Indian investors
can diversify their currency exposure.
This is because the Rupee is not yet fully
 Figure 3: Indian CPI and Gold in Rupee (re-based January 1971 = 100) Gold Demand Trends
and Outlook
10000
The past decade can be split into two
distinct periods as far as the value of gold
8000
sales is concerned: 1996-2001, when
sales were broadly stable in value terms,
6000
and 2002-2005, when sales accelerated
strongly (Figure 5). During the first period,
4000
spending averaged Rs. 284 billion per
annum and fluctuated in a relatively nar-
2000
row range of Rs. 224-316 billion a year.
Spending was especially strong in 1998
0
Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 thanks to the release of pent up demand
CPI Gold in Rupee
following the removal of import controls
Source: Global Insight
in November 1997. Gold sales were
convertible – Indians are only allowed to changing, with the emergence of new broadly stable in the three years that fol-
hold financial assets in Rupees – where- large-scale retailing. Shopping centres lowed, held back by relatively weak
as they have been allowed to hold gold are starting to spring up across urban income growth. Sales in tonnage were
since 1990 when the Gold Control Act India, something which is changing the more volatile over the period, averaging
was repealed. face of retailing and will affect traditional 709 tonnes and fluctuating between
gold retailers. KPMG and the Federation 506-810 tonnes. The higher variability of
Recent economic trends of Indian Chambers of Commerce and volume as oppose to value spending is a
The Indian economy has enjoyed rapid Industry estimate that the amount of function of both the retail price setting
growth over the past decade, thanks to shopping centre space will have risen to mechanism in Indian, as well as the
the progressive liberalisation of its 90 million square feet by the end of 2007, origins of demand. The price of jewellery
economy and the consequent inflow of more than four times the 22 million changes in line with changes in the inter-
2
foreign direct investment, which has square feet estimated in 2005 . national market price in India, with each
allowed the economy to start reaping the
benefits of globalisation on a truly mas- Figure 4: GDP growth (% yoy)
sive scale. India is now the fifth largest 9.0

economy in the world (on a PPP basis)

8.0
having posted average annual growth
7.0
rate of 6% p.a for the past decade (Figure
6.0
4). The economy shows no signs of slow-
ing either. A noticeable feature of India’s 5.0

development has been the strength of its 4.0

domestic economy relative to most 3.0

emerging markets in Asia. This is partic-

2.0
ularly true of consumer spending, which
1.0
has accounted for the lion’s share of
0.0
growth over the past decade. The
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
country’s $200 billion retail industry is Source: Global Insight

2 Indian retail: on the fast track, KPMG, Federation of Indian Chambers of Commerce and Industry, December 2005.

3
gold:report w w w. g o l d . o rg

Figure 5: Gold Demand (Volume and Value) and Gold Price (Rupees) item weighed then priced according to
the prevailing daily market rate. The retail
950 19,500
mark up is also normally relatively small
850 18,500
in relation to the value of the piece.
750 17,500 Still, the value of gold sales is often quite
650 16,500 price inelastic, especially where gold is
being used as a long-term savings vehi-
550 15,500
cle. A prime example would be the par-
450 14,500
ents of a baby girl saving for a future
350 13,500
Streedhan, who will usually purchase a
250 12,500 certain monetary value of gold each
150 11,500 month, although the volume of gold they
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
can afford each year will rise and fall with
Total demand (Tonnes) LHS Total demand Value (Rs. Billions) LHS Price (Rupees) RHS

Source: GFMS Ltd., Global Insight the price.

That Indian demand is not necessarily
Figure 6: Volatility and demand (observation period 1993-2005) adversely impacted by rising prices is
Volatility (Annual average 22-day annualised rate %) clear from the experience of the past few
16
years (2002-2005), when gold demand
15
rose steadily from Rs. 276 billion to Rs.
14
473 billion (or 571 tonnes to 750 tonnes)
13
despite a coincident rise in the gold price
12 from Rs. 15,026 to Rs. 19,599. Indeed, a

11 rising price can often stimulate invest-

ment demand for gold, as was the case
10
in Q1 2006, when retail investment
9
spending surged by 32% year-on-year
8
despite an 11% rise in the gold price in
Change in demand (Rupee, Value) % YOY
7
-20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0
rupee terms. What does seem to

Source: GFMS, Global Insight (All Calculations WGC) adversely impact on demand is a pick up
in the pace of daily price fluctuations or
Figure 7: Gold price volatility (rolling 22-day annualised rate) volatility. Consumers are wary about pur-

40%
chasing when the price is volatile for fear
that they buy and then find the price falls.
35%
Figure 6 shows the relationship between
30%
the average annual 22-day rolling
25% annualised volatility rate of the rupee-

20%
denominated gold price and the change
in the value of gold sales: the two show a
15%
clear inverse relationship over the
10%
sample period from 1993 to 2005. The
5% same message would seem to come
from H1 2006’s experience, when the
0%
Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 value of spending fell by 7%, as gold
Source: Global Insight (All calculations WGC) price volatility spiked upwards (Figure 7).

SEPTEMBER 2006 4
The main theme of the past few years Figure 8: Employee Compenstation and Gold Demand (% YOY)
has been a solid upswing in gold sales, 60 25

with spending increasing from Rs. 276 50

20
billion in 2002 to Rs. 473 billion in 2005.
40
This has been underpinned by social and 15
30
economic changes in the Indian economy
20 10
– trends that look set to persist – along-
10 5
side new and better marketing cam-
0
paigns from 2004 and a growing 0

perception that higher gold prices are -10

-5
here to stay. Indians are enjoying a rapid -20

acceleration in income growth, which is -30 -10

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
supporting discretionary spending on
Gold (Value) % yoy LHS Gold (Tonnes) % yoy LHS Employee Compenstation (Nominal, % yoy) RHS
consumer goods, including gold (Figure
Source: Global Insight
8). More workers are moving from low
income to middle and high income Figure 9: Number of households by income distribution
(Millions, constant 1997 PPP dollars)
quartiles, as India continues to attract
120 0.9
large volumes of foreign direct invest-
0.8
ment, especially into the outsourcing and 100
0.7
IT sectors. Last year, an estimated 110
million households were earning 80 0.6

between $10-30K, 16 million between 0.5

60
$30-80K and just short of a 1 million earn- 0.4
ing over $80K (Figure 9). Global Insight,
40 0.3
an economic forecasting agency,
0.2
expects the number of people earning 20

between $13-30K, $30-80K and $80K+ 0.1

to increase by 52%, 87% and 200% in 0 0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
real terms to 167 million, 30 million and 3
$10,000-$30,000 (LHS) $30,001-$80,000 (LHS) $80,000+ (RHS)
million respectively by 2015. Source: Global Insight

Social trends are also changing. More

women are seeking their independence
by entering the workforce, which means
there are increasingly two bread winners
in the family and there is more dispos-
able income available for discretionary
purchases than in the past. Equally
importantly, young middle class Indians
are more willing to spend than their par-
ents’ generation was, while tastes are
becoming more international,
households increasingly demanding all
the conveniences of the modern world,
such as mobile phones and home com-
puters. A recent WGC study , conducted
across six key gold markets, including
India, found that the increasing inde-
pendence of woman in developing coun-
tries and shifts in
behaviours, combined with a significant
increase in their personal wealth, has
with meant that gold has become a more
relevant and desirable product to a
greater number of women. This has
increased the number of women falling
3
into gold’s core target group in India
from 25 million in 2002 to 32 million
in 2005 and contributing to the rise in
gold purchases over the past few years.
attitudes and Of course, gold must compete with a
growing desire for other luxury goods
too. However, as there is a much bigger
pool of money available, it seems likely
that the net impact of these socio-

3 A Passion for Gold: Realising Potential in the Gold Market, World Gold Council, August 2006.

5
gold:report
economic changes will be positive for
gold sales, especially with the relevant
marketing initiatives targeted at India’s
new affluent young middle class. Recent
experience supports this premise, with
the rise in gold sales outstripping the rise
in general retail spending indices. These
socio-economic changes have led to
enormous growth in the potential market
for gold jewellery.
Ways to buy gold
Traditionally most investment has taken
the form of physical gold. In 2005,
Indians bought 102 tonnes of gold coins
and bars. But there are new ways to
invest in gold. Since October 2003 the
government has allowed futures trading
and there are now three futures
exchanges, the two largest being the
Multi Commodity Exchange of India Ltd
(MCX) and the National Commodity and
Derivatives Exchange Ltd (NCDEX). The
next major development is likely to be the
arrival of Exchange Traded Funds
(ETFs), expected before the end of 2006.
UTI Asset Management Company Ltd
and Benchmark Asset Management Ltd
are currently seeking regulatory approval
to sell a gold ETF. These instruments give
investors a relatively cost efficient and
secure way to access the gold market.
They are listed securities that are backed
by allocated gold held in a vault on
behalf of investors and are intended to
offer investors a means of participating in
the gold bullion market without the
necessity of taking physical delivery of
gold, and to buy and sell that interest
through the trading of a security on a
regulated stock exchange.
4
The RBI was valuing its gold reserves at Rs. 84.39 per 10 grammes, whereas the market price was around Rs. 2,200 per gramme.
5
These figures do not include jewellery that is traded in for another piece.
SEPTEMBER 2006
The Reserve Bank of India
The Reserve Bank is required to hold a
fixed amount of gold under the Reserve
Bank of India Act. The original RBI Act
(1934) obliged the Reserve Bank to hold
40% of its assets in gold coin, gold bul-
lion and foreign securities, with not less
than Rs. 400 million in value held in gold.
The system was later amended, under
the Reserve Bank of India Amendment
Act 1956, to the minimum reserve system,
that required the bank to hold at least
Rs.1150 million of its assets in gold (this
did not imply the need to acquire addi-
tional gold, as the value of existing gold
reserves were revised up at the time). Rs.
1150 million equates to just $24.7 million
at today’s exchange rate and is tiny in
comparison to India’s total foreign
exchange reserves of $151.6 billion.
India mobilised its gold reserves during
the 1991 balance of payments crisis.
Between May and July, India shipped a
total of 47 tonnes of the country’s gold
reserves (the RBI is allowed to hold up to
15% of its total gold reserves outside the
country) to the Bank of England as collat-
eral against a $400 million loan and
leased a further 20 tonnes of confiscated
gold (not included in the reserve figures)
to Union Bank of Switzerland with a six-
month buyback option to raise a $200
million loan. The funds were used to help
India meet its short-term debt obligations
and import bill. The RBI bought back all
67 tonnes of gold later that year. It also
revalued its gold reserves from Rs. 28 bil-
lion to Rs. 72 billion, as it moved from
4
using an outdated gold price to valuing
its reserves at close to the international
market price. The move vastly improved
6
w w w. g o l d . o rg
India’s reported import coverage ratio.
The RBI currently holds 357.7 tonnes of
gold, which though small in comparison
to total reserves (4.4% as at September
2006), is still the fifteenth highest of cen-
tral banks in tonnage terms in the world.
Supply
Mine production
There is a huge mismatch between
demand and primary supply in India, the
balance being made up by imports. The
only major gold mine currently in produc-
tion is the Hutti mine, owned by state-
owned Hutti Gold Mines Company
Limited, which produces around 3
tonnes of gold a year. The other major
operation – the Kolar Gold Fields –
closed in April 2000 having produced a
total of 800 tonnes of gold. Hindustan
Copper also produces some gold as a
by-product, but its output is small, at just
0.2 tonnes a year. Still, there is scope for
some catch up in the future, as the geo-
logical terrain of India is very similar to
other major gold producing countries, like
South Africa and Australia, and as the
government has now opened the mining
sector to foreign direct investment.
Above ground stocks
Supply from above ground stocks is
much more important in India, with the
main source of domestic supply coming
from recycled jewellery. Over the past
five years, Indians have recycled an aver-
age of 105 tonnes of gold per annum.
Scrap supply is sensitive to general eco-
nomic conditions, the price of gold and
price expectations. The sharp increase in
scrap5 in 2002 and 2003 (Figure 10) was
driven by a combination of distress sell-
ing in rural areas because of the poor
2002 monsoon and subsequent hit to
agricultural incomes, as well as a higher
high gold price (the gold price averaged
Figure 10: Supply of gold from fabricated scrap (tonnes)
22000
20000
18000
16000
14000
12000
10000
1996 1997 1998 1999
Supply of gold from fabricated old scrap, tonnes (RHS)
Disclaimer
This report is published by the World Gold
Council (“WGC”), 55 Old Broad Street,
London EC2M 1RX, United Kingdom.
Copyright © 2006. All rights reserved. This
report is the property of WGC and is protected
by U.S. and international laws of copyright,
trademark and other intellectual property laws.
This report is provided solely for general infor-
mation and educational purposes. The infor-
mation in this report is based upon information
generally available to the public from sources
believed to be reliable. WGC does not under-
take to update or advise of changes to the
information in this report. Expression of
opinion are those of the author and are sub-
ject to change without notice.
The information in this report is provided as an
“as is” basis. WGC makes no express or implied
representation or warranty of any kind con-
cerning the information in this report, includ-
ing, without limitation, (i) any representation or
warranty of merchantability or fitness for a par-
ticular purpose or use, or (ii) any representa-
tion or warranty as to accuracy, completeness,
reliability or timeliness. Without limiting any of
6
Gold Survey 2006, GFMS Ltd.
$309.68 in 2002 and $363.32 in 2003,
compared with $271-$279 in the previous
three years). Price expectations also mat-
ter. For instance, the decline in scrap
supply in 2005, in the face of high prices
140
130
120
110
100
90
80
70
60
2000 2001 2002 2003 2004 2005
Price (LHS)
Source: GFMS Ltd., Global Insight
the foregoing, in no event will WGC or its affil-
iates be liable for any decision made or action
taken in reliance on the information in this
report and, in any event, WGC and its affiliates
shall not be liable for any consequential, spe-
cial, punitive, incidental, indirect or similar
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This report is not, and should not be con-
strued as, an offer to buy or sell, or as a solic-
itation of an offer to buy or sell, gold, any gold
and generally good economic condi-
tions, is attributed to expectations of still
higher prices6.
In summary, India looks poised to remain
the world’s foremost gold consumer in
tonnage terms for many years to come.
Its dynamic population growth and
strong cultural and religious affinity to
gold will continue to underpin structural
demand. Meanwhile, rapid income
growth, thanks to the influx of foreign
capital, should, in tandem with new suc-
cessful marketing campaigns, continue
to boost discretionary spending on gold,
notwithstanding temporary fluctuations
associated with spikes in price volatility.
India’s demand will continue to be satis-
fied almost entirely from imports, as
aside from the scrap market, very little
supply comes from domestic sources.
related products or any other products, secu-
rities or investments. This report does not, and
should not be construed as acting to, sponsor,
advocate, endorse or promote gold, any gold
related products or any other products, secu-
rities or investments.
This report does not purport to make any rec-
ommendations or provide any investment or
other advice with respect to the purchase, sale
or other disposition of gold, any gold related
products or any other products, securities or
investments, including, without limitation, any
advice to the effect that any gold related trans-
action is appropriate for any investment objec-
tive or financial situation of a prospective
investor. A decision to invest in gold, any gold
related products or any other products, secu-
rities or investments should not be made in
reliance on any of the statements in this
report. Before making any investment deci-
sion, prospective investors should seek
advice from their financial advisers, take into
account their individual financial needs and
circumstances and carefully consider the risks
associated with such investment decision.