February 22, 2012

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Policy & Research Unit

India Goes Easy On Gold Buying

In Oct-Dec As Rupee Slides

February 22, 2012

February 22, 2012

D epreciating rupee and high gold prices have jointly forced to

India to cede its long-held position as the world’s No. 1 con-

sumer of the precious metal to China in October-December.

India and China together account for more than half of total global

demand for gold, with demand from India typically surpassing that

of China’s. But the fourth quarter of 2011 registered a change in

the trend.

According to World Gold Council data, total demand for gold in

India was 173 tonnes in October-December, down 42% from a

year ago. Demand in China, on the other, increased marginally

from a year ago to 190.6 tonnes.

While both countries registered high inflation, particularly in the

first half of 2011, weakening of the rupee against the US dollar

dampened demand for gold in India.

In October-December, while gold prices rose 23.5% in dollar

terms from a year ago, in rupee terms, gold prices shot up a whop-

ping 39%.

Rupee depreciated 8.4% versus the dollar during the quarter, while

the Chinese yuan that appreciated 0.2% in the same period.

On December 16, rupee weakened to its all-time low of `54.30

versus the dollar.

Impact of rupee depreciation is also reflected in the fact that while

international gold prices (in dollar terms) fell 0.8% in October-

December on a sequential basis, Indian prices were up 8.8% dur-

ing the same period.

In the quarter that went by India’s jewellery demand nosedived

44% from a year ago to 103 tonnes and investment demand

plunged 38% to 70 tonnes.

It was mainly depreciation of rupee in the second half of the year

that resulted in India’s gold demand during July-December weak-

ening 33% from the first half.

India Goes Easy On Gold Buying In Oct-Dec As Rupee Slides

Gold Demand in India

Jan - Dec 2010 Jan - Dec 2011 % YoY Growth

Tonnes ` crore Tonnes ` crore Volume Value

Jewellery 657.4 1,18,314 567.4 1,34,043 -14 13

Investment 348.9 62.793 366 86,464 5 38

Total 1,006.3 1,81,107 933.4 2,20,507 -7 22

Total Global Demand (in tonnes)

Oct-Dec

2011

Oct-Dec

2010

Y-o-Y

Growth

Jewellery 477 562 -15.1%

Bars, Coins investment 341 339 0.6%

ETF and Similar products 87 22 295.5%

Technology 112 116 -3.4%

Total 1,017 1,039 -2.1%

Gold Demand in India (in tonnes)

Oct-Dec

2011

Oct-Dec

2010

Y-o-Y

growth

Jewellery 103 185.5 -44.5%

Bars, Coins Investment 70 113.1 -38.1%

Total 173 298.6 -42.1%

February 22, 2012

Traditionally, demand across the globe and particularly in India

peaks in the last quarter as a number of festivals including

Dusserra, Diwali, Christmas and New Year and the wedding sea-

son fall in this quarter.

Recycled Gold Supply Dips In 2011

G old is supplied mainly through mine production and recycled

gold. In 2011, both these witnessed divergent trends. While

mined production rose 4% and reached an all-time high, recycled

gold supply contracted 2%.

Recycled gold supply fell despite higher prices. But this decline

was restricted mainly to developing markets like India, China and

Turkey. These markets have comparatively been more active in

recycling gold than Europe, the US and Japan.

Global Demand Surges

F or the first time ever, global demand for gold in value terms

exceeded $200 billion in 2011, according to the WGC’s latest

report.

Global demand in terms of quantity rose to 4,067 tonnes in 2011,

the highest tonnage since 1997, the report said.

While demand in quantitative terms was marginally up, in value

terms demand surged 28.8%. This is because of a sharp increase in

price of gold during the year.

Investment demand — represented by bars and coins and ex-

changed traded funds and similar products — registered acceler-

ated growth during the year. This demand was underpinned by:

Financial crisis in the euro area

High inflation in some countries as gold is considered as

a safe hedge against inflation by some countries

Weak returns by alternative investment avenues

Key markets that drove investment demand in 2011 were India,

China and Europe.

India Remains Top Gold Importer

I ndia remains the largest importer of gold on an annual basis

with the country importing 933 tonnes in 2011. While China

recorded a robust 20% growth, its total demand was way behind

India’s at 769.8 tonnes.

India remained the top importer of gold despite rising gold prices

and weakening of the Indian rupee against the dollar in the second

half of the year.

Total Global Demand (in tonnes)

CY11 CY10 Y-o-Y

Growth

Jewellery 1,964 2,017 -2.6%

Total bars and Coins invest-

ment 1,486 1,200 23.8%

ETF and Similar products 155 368 -57.9%

Technology 463 466 -0.6%

Total 4,067 4,050 0.4%

Total Global Demand (in $ billion)

CY11 CY10 Y-o-Y

Growth

Jewellery 98.6 79.7 23.7%

Total bars and Coins investment 75 47.6 57.6%

ETF and Similar products 7.8 14.5 -46.2%

Technology 23 18.4 27.2%

Total 205.5 159.5 28.8%

February 22, 2012

India’s demand for gold touched `2,20,507 crore in 2011, up 22%

over the previous year, which in turn was up 98% from 2009.

India traditionally has been investing in gold in the form of jewel-

lery. However, given the high gold prices, jewellery demand in

India dipped 14% to 567.4 tonnes in 2011 from the previous year.

Demand for gold coins and bars rose to 366 tonnes, up 5%.

China’s jewellery and investment demand for the full year stood at

82% of India’s demand. Until recently, China’s demand was only

about half of India’s demand.

Gold Continues Bull Run

I n 2011, gold prices surged to a record high of $1,895/troy

ounce in September. Financial crisis in the euro-zone and the

US, together with weak global economic situation led to demand

for gold — considered a safe haven investment option — rising

sharply.

Volatility in gold prices in 2011 resulted in price averaging at

$1,571.5/troy ounce, up 28.3% from a year ago.

Prices in India touched record highs too. Gold prices averaged

31.3% higher from the year-ago level.

G iven the weakening demand for gold in India in the last

quarter of 2011, many analysts see it as sign of medium-to-

long term demand exhaustion. However, World Gold Council in

its release states that investment demand is yet to reach its poten-

tial.

Slide in prices of gold in October-December from the record

highs touched in July-Sepetmber was also a result of profit book-

ing. Also, threat of inflation and low real deposit rates (deposit

rates minus inflation) in emerging economies and ongoing debt

crisis in some nations will push up demand for gold.

"On India, I think near-term it may have peaked with a flat year in

prospect of tonnage, but medium-term the India growth, wealth

and urbanisation story is intact and we expect new highs in de-

mand," said Marcus Grubb, managing director, investment,

WGC.

Nomura in its latest report states: ―A continuation of this trend

should augur well for India’s current account balance. In the 12

months ending October 2011, India imported $51 billion of gold.

If not for gold imports, India would have recorded a marginal

current account surplus. Lower gold imports are also a good lead-

ing indicator of inflation. High inflation expectations encourage

people to shift to gold as a store of value. Given its limited sup-

ply, prices rise immediately. In contrast, WPI inflation only

gradually adjusts higher. The fall in gold demand, therefore, sug-

gests that inflation expectations have moderated, which should

lower headline WPI inflation in the coming quarters.‖

Investment Demand Yet To Reach Full Potential, Says World Gold Council

February 22, 2012

Sonal Thakur

Senior Sector Analyst 022-61541840

Jones Koshy

Senior Editor 022-61541764

Rajrishi Singhal

Head – Policy & Research 022-61541730

Policy & Research Unit, Dhanlaxmi Bank, Trade View, Kamala Mills,

PB Marg, Worli, Mumbai 400013

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