INDIA GOLD REPORT –– INDIA: HEART OF GOLD

Revival
About The World Gold Council
The World Gold Council’s mission is to stimulate
and sustain the demand for gold and to create
enduring value for its stakeholders. The organisation
represents the world’s leading gold mining
companies, who produce more than 60% of the
world’s annual gold production in a responsible
manner and whose Chairmen and CEOs form the
Board of the World Gold Council (WGC).

As the gold industry’s key market development

body, WGC works with multiple partners to create
structural shifts in demand and to promote the
use of gold in all its forms; as an investment by
opening new market channels and making gold’s
wealth preservation qualities better understood;
in jewellery through the development of the premium
market and the protection of the mass market; in
industry through the development of the electronics
market and the support of emerging technologies
and in government affairs through engagement in
macro-economic policy issues, lowering regulatory
barriers to gold ownership and the promotion of
gold as a reserve asset.

The WGC is a commercially-driven organisation and

is focussed on creating a new prominence for gold.
It has its headquarters in London and operations
in the key gold demand centres of India, China,
the Middle East and United States. The WGC is
the leading source of independent research and
knowledge on the international gold market and
on gold’s role in meeting the social and economic
demands of society.
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India gold report – India: Heart of gold
Revival

Contents

Introduction 3

Executive summary 3

Context 5

Jewellery consumption 9

Investment demand 12
Gold’s characteristics inspires confidence to invest 12
Gold Exchange Traded Fund (ETFs) 16
India Post gold retail programme 17
Gold-linked Microfinance scheme 18

Decorative and Industrial demand 19

Gold imports 20

Seasonality and monsoon rains 21

Seasonality 21
Monsoon rains 22

Central bank – The Reserve Bank of India 23

Recycled gold supply 24

Conclusion 24
For more information, please contact:

Eily Ong
Manager, Investment Research
eily.ong@gold.org

Juan Carlos Artigas

Manager, Investment Research
juancarlos.artigas@gold.org

Louise Street
Analyst, Investment Research
louise.street@gold.org

Johan Palmberg
Analyst, Investment Research
johan.palmberg@gold.org

Nitin Tuteja
Analyst, Investment Research
nitin.tuteja@gold.org

Marcus Grubb
Managing Director, Investment
marcus.grubb@gold.org
 3
India gold report – India: Heart of gold
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Introduction
This report is the first of a new series on the Indian gold market. The first report
in the series provides an analysis of the history, recent developments and the
revival of Indian demand during 2010. Further reports will analyse the unique
attributes of the Indian jewellery market as well as the strategic outlook for
Indian gold demand over the next few decades.

Executive summary
India is the world’s largest gold consumer market and in 2010, Indian gold
demand is likely to recover near to its pre-credit crunch level following the fall in
demand in 2009. This should drive gold imports up from the relatively low levels
experienced last year. In 2009, total Indian gold demand reached US$19bn,
or Rs974bn, accounting for 15% of the global gold market. Over the past ten
years, the value of gold demand in India has increased at an average rate of
13% per year, outpacing the country’s real GDP growth by almost 6%.

In India, gold is seen as a symbol of security and as a sign of prosperity. Unlike

other gold markets, the love for gold has not only spread across many generations
but also across all social strata within the country. Indian consumers regard
gold jewellery as an investment and are well aware of gold’s benefits as a store
of value. Gold is also recognised as a form of money in India, a tradable liquid
asset. It is one of the foundation assets for Indian households and a means to
accumulate wealth. At the end of 2009, Indian consumers’ price expectations
were strengthened by the Reserve Bank of India’s purchase of 200 tonnes of
gold from the IMF and the transaction reinforced the perception among local
consumers that gold is reliable and safe as a monetary asset.

India will remain pivotal to the global gold market. In the Indian culture, gold is
an integral part of daily life where purchases of gold jewellery are considered
as a form of a liquid and tradable investment for the accumulation of wealth.
It is important to highlight that in analysing the gold market in India, traditional
perceptions of the division between jewellery and investment demand and
demand drivers do not apply.

As consumers have adjusted their price expectations upwards, a further rise

in gold jewellery and investment demand could be anticipated and this trend
is projected to continue over the long-run as local investors are buying gold
driven by wealth accumulation motives. The fact that Indian gold jewellery and
investment demand remains robust, despite the rising price emphasises the
enduring desire among local consumers to purchase gold driven mainly by
its allure as a jewellery and its properties as a hedge to offset the effects of
depreciation and erosion of both savings and income. The country currently has
one of the highest saving rates in the world; estimated at around 30% of total
income, of which 10% is invested in gold. Continued rapid economic growth
and urbanisation will create greater wealth but also inflationary pressures
stimulating gold demand.
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India gold report – India: Heart of gold
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Asian demand for gold will be a key driver of the gold market for decades to
come. Currently, India and China together account for approximately 25% of
annual gold demand. They are likely to grow further as a proportion of demand
in years to come.1

In the longer term, we are confident that India’s favourable demographic trends,
the growing affluent middle classes and declining age profile, should ensure
buoyant consumption growth. The investment sector exhibits great potential for
further growth and will play an increasingly important role in the domestic gold
market as it overlaps with gold jewellery consumption, boosted by increasing
accessibility and opportunities in new gold investment products. Despite being
the largest global gold consumer, Indian jewellery consumption intensity is still
relatively low. Its consumption of jewellery on a per capita basis of 0.4 grams in
2009, remains below countries such as Italy and the US. This is a reflection of
both the country’s large population and low incomes. The strategic outlook for
India will be the subject of a subsequent report in Q1 2011.

Chart
Gold, 1: Gold,
Rs/oz Rs/oz
and total goldand total gold
demand, Rs bndemand,
in India Rs bn in India

Gold demand (Rs bn) Gold price (Rs/oz)

1200 60,000

1000 50,000

800 40,000

600 30,000

400 20,000

200 10,000

0 0
1992 1994 1996 1998 2000 2002 2004 2006 2008 1H 2010

Gold demand (Rs bn) Gold (Rs/oz)

Note: Indian gold consumption figure includes jewellery consumption, investment and industrial demand only
Source: WGC estimates, Bloomberg, GFMS

1 
For an in depth study of the gold market in China please refer to the World Gold Council China
Gold Report – Gold in the Year of the Tiger (Eily Ong, March 2010)
 5
India gold report – India: Heart of gold
Revival

Context
Gold is a symbol of wealth and good fortune in India and is also used for daily
consumption in the form of jewellery and ornaments. Since the start of 2010,
Indian gold demand has recovered well from 2009 levels amidst the global
economic uncertainty.

India is the largest gold market in the world. In terms of jewellery consumption,
investment and industrial demand, it accounted for nearly 600 tonnes (15%)
of total global demand for gold in 2009. Based on WGC estimates, the nation
owns over 18,000 tonnes of above ground gold stocks2 worth approximately
US$800bn at today’s gold price and represents 11% of global stock. This is
equivalent to nearly half an ounce of gold ownership per capita.
India gold market as a % of global gold market, tonnage terms (2009)

Chart 2: India gold market as a % of global gold market, tonnage terms (2009)

16

14

12

10

-
Annual demand Above ground Recycled gold Central Bank Annual mine
stocks holding supply

India (% of global gold market)

Source: WGC estimates, GFMS, IMF

2 
Above ground gold stocks here referred to all physical fabrication and gold holdings, including
private, central bank and institutional
6
India gold report – India: Heart of gold
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In 2009, total Indian gold consumption reached US$19bn or Rs974bn equivalent

at the end of 2009. Over the past decade, this has increased at an average
rate of 13% per year, outpacing the country’s real GDP, inflation and population
growth by 6%, 8% and 12% respectively.

Chart 3:
Average Average
annual annual
10-year 10-year
growth growth
in India, % rates in India, %

20

16

12

0
Population Inflation Real GDP Gold demand Gold price Gold imports
(mn) (%) (%) (Rs bn) (Rs/oz) (Rs bn)

2000-2009

Source: WGC estimates, IMF, Bloomberg, GFMS

Gold jewellery demand in India, the world’s largest gold jewellery market, rose
67% year-on-year to 272 tonnes in the first half of 2010. Over the same period,
the average domestic gold price surged to almost Rs52,800/oz, before hitting
a new high of Rs60,460/oz on 15 October 2010. Despite the higher gold price,
market sentiment remains positive, especially with the local gold market also
benefitting from the strengthening of the rupee against the US dollar.

In India gold often represents a large percentage of the family assets and
during the first six months of 2010 the Indian retail investment market was one
of the strongest in the world. Demand increased substantially by 264% to 93
tonnes in this period (from 25 tonnes in H1 2009) and accounted for 25% of total
domestic gold demand. The recovery in Indian demand for gold investment
has stemmed from an increased appetite for capital preservation among local
investors’, as well as for gold’s properties as a US dollar hedge; heightened risk
aversion; and higher inflation expectations.

The main participants in the domestic gold industry, including State Reserve
Bank of India and commercial banks such as HDFC, India Post Office, Muthoot
Pappachan Group, and gold jewellers (such as Tanishq, GRT, TBZ to name a
few) provide consumers and investors with a broad range of other channels
and products. These products include the sale of gold coins and bars, gold
saving schemes and “Swarna Varsham” microfinance gold link scheme.
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India gold report – India: Heart of gold
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India’s gold Exchange Traded Funds (ETFs) market has also enjoyed further
growth in recent quarters. Total holdings amounted to 11 tonnes by the end
of August 2010, up 77% from the same period last year, from 6 tonnes. Gold
ETFs are structured to allow the inclusion of investments other than gold for
up to 10% of their assets. However, currently all the Indian ETFs are backed
by physical gold. The recent growth in holdings and the development of new
products suggests the Indian gold ETF market may now be maturing after a
relatively slow start. However, historic figures indicate that price corrections have
not triggered significant redemptions, but in fact have encouraged investors to
increase their holdings.

India is currently Asia’s third largest economy and its recent growth compared
favourably with that of China. The domestic economy has grown at an average
8% over the past four years and is projected to grow at 8.5% in FY2010 according
to Reserve Bank of India (RBI). Therefore India stands out as one of the world’s
fastest growing economies and based on Consensus Economics forecasts, the
country’s growth forecast will reach 8.3% in FY2011. The International Monetary
Fund (IMF) also expects the outlook for India’s economy to remain strong and
forecasts the country’s real GDP growth to remain in excess of 8% from 2010-
15, an enviable rate of growth in comparison with most other economies and the
second fastest in the BRICs.3

Chart 4: Growth forecast for 2011

%
10

0
UK

UK
US

US
Germany

France

Eurozone

Japan

Italy

China

India

Indonesia

Saudi Arabia

Brazil

Russia

Argentina

Turkey

South Korea

South Africa

Mexico

Australia

World

Canada

Germany

France

Eurozone

Japan

Italy

Annual % change in GDP

Source: Consensus Economics

3
IMF (World Economic Outlook, October 2010). BRICs = Brazil, Russia, India and China
 8
India gold report – India: Heart of gold
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Broad money supply in India (given by M3) increased by Rs8tn (17%YoY)

during the 2009 which was higher than the year-on-year increase of Rs7tn in
the 2008 financial year. According to Bloomberg data, India’s supply of rupee
grew 1,383% to Rs52tn between 1992 and 2009, compared to a 430% increase
in the gold price over the same period to Rs51,115/oz.

Chart 5: Gold (Rs/oz) and Money supply M3 (Rs crore) in India

Rs crore Gold (Rs/oz)

6,000,000 60,000
Gold (Rs/oz)
60,000
5,000,000 50,000
50,000
4,000,000 40,000
40,000
3,000,000 30,000
30,000

2,000,000 20,000
20,000

10,000 1,000,000 10,000

0 0 0
04 2006 2008 1992 1994 1996 1998 2000 2002 2004 2006 2008

M3 (Rs crore) Gold (Rs/oz)

Note: M3 mainly comprises currency in public circulation, bank deposits and money invested in other saving
plans, Crore is equivalent to 10 million
Source: Bloomberg
Gold (US$/oz) and US dollar-rupee exchange rate (USDINR)
Gold (US$/oz) and US dollar-rupee exc

Chart 6: Gold (US$/oz) and US dollar-rupee exchange rate (USDINR)

Gold (US$/oz) USDINR Gold (US$/oz)

1,400
1,400 60
1,200
1,200 50 1,000
1,000 800
40
800 600
30 400
600
200
20
400
-
10 Jan-1992 Jan-1996
200
Gold (US$/oz)
- -
Jan-1992 Jan-1996 Jan-2000 Jan-2004 Jan-2008 Jan-2012

Gold (US$/oz) USDINR

Source: Bloomberg, including Bloomberg Consensus estimates from 2011

 9
India gold report – India: Heart of gold
Revival

The country’s rapid economic growth, high savings rate and favourable
demographics make India an important target destination for global
foreign investment. India’s foreign direct investment (FDI) inflows rose 13%
year-on-year to US$1.5bn in 2009. As a result of the FDI inflows, the rupee gained
5% against the US dollar in the same period and continues to exhibit an upward
trend albeit with rising volatility. It is currently one of Asia’s best performing
currencies and there is a strong consensus that the rupee will appreciate rather
than depreciate over the longer term. While the likely scale and timing of this
appreciation is unclear, the implications would be positive for the Indian gold
market and for the global gold demand balance. India is the world’s largest
consumer of gold in tonnage terms and an appreciating rupee in a country with
a strong affinity to gold is likely to stimulate higher gold demand.

Jewellery consumption
Gold jewellery accounted for around 75% of total Indian gold demand in 2009,
the remainder being investment (23%) and decorative and industrial (2%).
Indian consumers also regard gold jewellery as an investment and are well
aware of gold’s benefit as a store of value.

Gold plays a fundamental role in the marriage ceremony, and when it comes to
Indian weddings, gold is said to be considered a necessity rather than a luxury.
The gold (and other gifts) the bride receives are called her “Streedhan” (“Stree”
meaning woman and “dhan” meaning wealth) and are a means of passing
on some inheritance to daughters, as Hindu tradition dictates that the family’s
assets are only passed down to sons. The Streedhan will remain the property
of the bride, allowing her parents to ensure she is financially secure. Gold is
especially important in this respect as it remains directly under a wife’s control,
whereas she may not be privy to the family’s other financial affairs.

Chart
India 7: demand
gold India gold demand
by sector (%) by sector (%)

%
100

80

60

40

20

0
1992 1994 1996 1998 2000 2002 2004 2006 2008

Jewellery Investment Industrial

Source: WGC estimates, GFMS

10
India gold report – India: Heart of gold
Revival

Chart 8: Gold, Rs/oz and total gold jewellery demand, Rs bn in India

Gold, Rs/oz and total gold jewellery consumption, Rs bn in India

Gold jewellery consumption (Rs bn) Gold price (Rs/oz)

800 60,000

700
50,000
600
40,000
500

400 30,000

300
20,000
200
10,000
100

0 0
1992 1994 1996 1998 2000 2002 2004 2006 2008 1H 2010

Indian gold jewellery demand (Rs bn) Gold (Rs/oz)

Source: WGC estimates, GFMS, Bloomberg

Wedding-related demand accounts for a substantial proportion of overall

jewellery demand. This is particularly true in the south of India, where the most
popular wedding jewellery sets tend to be the more traditional, intricate but
bulky styles in heavier weights. In the northern cities there has been a trend
towards more ‘western’ styles, and lighter wedding sets, as well as diamond-set
pieces, are becoming increasingly popular.

In 2010, Indian gold jewellery consumption is likely to recover to near pre-credit

crisis level following the fall in demand in 2009. As consumers have adjusted
their price expectations upwards, a further rise in demand is anticipated.
Global gold jewellery consumption intensity
Chart 9: Global gold jewellery consumption intensity (2009)
Per capita gold jewellery
consumption (gm)
Per capita gold jewellery
consumption (gm) 3.1 Sau
3.1 Saudi Arabia
2.6
2.6
Hong Kong 2.1
2.1
1.6
1.6
Turkey
Turkey 1.1
1.1
Egypt
Egypt Italy
0.6 0.6 Russia
Russia South Korea UK USA INDIA S
INDIA
China China
Taiwan Japan Thailand Taiw
0.1 Thailand 0.1
0 20 40 60 0

GDP per capita (US$'000)

Source: WGC estimates, GFMS, Bloomberg, IMF

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India gold report – India: Heart of gold
Revival

Gold jewellery demand has picked up more forcefully as initiatives from gold
jewellers’ such as “save and buy schemes” have proven effective in reviving
local gold jewellery demand. The saving scheme provides consumers the
opportunity to purchase gold jewellery, (and, in some cases gold coins or gift
vouchers as well) through easy instalments. At the time of maturity, the jeweller
will also contribute a bonus amount as a scheme benefit to the consumer’s
accumulated amount. These schemes are well aligned to the culture of Indian
gold demand, where the purchase of gold jewellery is also considered as a
form of investment.

Chart 10:(Indexed
Population Population
2010(Indexed
= 100) 2010 = 100)

Indexed 2010 Population = 100

140

130

120

110

100

90

80
2010E 2020E 2030E 2040E 2050E

Brazil China India Russia US

Source: United Nations

Charturban
Indian 11: Indian
vs. ruralurban vs. rural population (% of total population)
population

(% of total population)
80

70

60

50

40

30

20

10

0
2000 2003 2006 2009 2012 2015 2018

Urban Rural

Source: IHS Global Insight

12
India gold report – India: Heart of gold
Revival

Despite being the largest source of global gold demand, Indian jewellery
consumption intensity is still relatively low. National jewellery consumption on
a per capita basis was 0.4 grams in 2009, well below countries such as Italy
and the US. This is a reflection of both India’s large population and its relative
poverty compared to most other key gold markets. According to IHS Global
Insight, only 356 million of the Indian population lived in cities in 2009. IHS Global
Insight expects the urban population to reach 468 million (i.e. an additional 112
million) in 2020, hence providing more room for growth and improvement in the
standards of living through urbanisation. It is also worth noting that a unique
feature of the Indian market is that the average age of the population is younger
than in Europe and the United States.

In the longer term, India’s favourable demographic and age profile are likely to
ensure buoyant consumption growth, especially given the existing strong affinity
to gold in Indian culture. The improving economic position of many domestic
consumers will also play a part in determining demand for gold in coming years.

Investment demand
India’s gold investment revolution is gathering pace

In India, gold is one of the foundation assets for Indian households in the form
of both jewellery and investment. It is viewed as a secure, liquid investment, a
capital and value preserver and is the second preferred investment after bank
deposits. Saving rates are estimated at around 30% of total income of which
we believe around 10% is invested in gold. Whilst it is a fact that the traditional
divisions between gold jewellery and investment overlap in India, during the first
half of 2010, Indian net retail investment in gold has increased by 264% year-
on-year to 93 tonnes. Net retail investment comprises individuals’ purchases

Chart
Gold, 12: and
Rs/oz Gold, Rs/oz
total gold and total gold
investment investment
demand, tonnes indemand,
India tonnes in India

Gold investment demand (tonnes) Gold price (Rs/oz)

250 60,000

50,000
200

40,000
150
30,000
100
20,000

50
10,000

0 0
1992 1994 1996 1998 2000 2002 2004 2006 2008 1H 2010

Indian gold investment demand (tonnes) Gold (Rs/oz)

Source: WGC, GFMS, Bloomberg

 13
India gold report – India: Heart of gold
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of coins and bars and accounted for 25% of Indian gold demand in the same
period. There is a growing domestic interest in gold investment, stimulated by
a high savings ratio and the increasing gold investment opportunities available
to Indian investors.

1. Gold’s characteristics inspires confidence to invest

• D
 iversification. Analysis of correlations between gold and key domestic
financial assets over one-, three- and five-year periods suggests that there
is no significant relationship between gold and Indian stocks, which makes
it an ideal addition to achieve a diversified portfolio.
Correlations with gold, weekly returns 1-5 years ending September 2010 Correlations with gold, weekly returns
Chart 13: Correlations with gold, weekly returns 1-5 years ending 30 September 2010

BSESMCAP

BSEMDCAP

BSEMETL

BSE100

BSE200

BSE500

SENSEX -1.00 -0.80 -0.60 -0.40

-1.00 -0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 Correlations, weekly returns
Correlations, weekly returns
Correlations, weekly returns 1 year ending September 2010 Correlations, weekly returns
Correlations, weekly returns 3 years ending September 2010
Correlations, weekly returns 5 years ending September 2010

Note: SENSEX = BSE Sensex 30 Index, BSE500 = Bombay Stock EX 500 Index,
BSE100 = Bombay Stock EX 100 Index, BSEMETL = BSE Metal Index, BSEMDCAP = BSE Mid-cap Index,
BSESMDCAP = BSE Small-cap Index, Gold = Gold (Rs/oz).
Source: WGC estimates, Bloomberg

• U
 S dollar hedge. Gold is traditionally a good hedge in the event of a
depreciation in the value of the US dollar against other currencies. Since the
Indian rupee is also not fully convertible, gold is one of the limited ways in
which Indian investors can diversify their currency exposure.

• V
 olatility. In our analysis of gold and selected equity indices in India, gold
has consistently moved independently from the factors that have driven the
main equity markets and has exhibited lower volatility. BSE Sensex 30 Index,
BSE500 Index and BSE Metal Index, for example, have had annualised
volatilities of 27%, 30% and 46%, respectively, over the past five years
(based on weekly returns ending September 2010). The volatility of gold
over the same period was just 23% in rupee terms.
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India gold report – India: Heart of gold
Revival

Chart 14: Gold price, Rs/oz and USD Trade Weighted Index

Gold (Rs/oz) USD Index

USD Index 60,000 120

120
50,000 110
110
40,000 100
100
30,000 90
90
20,000 80
80

70 10,000 70

60 - 60
Jan-2006

Jan-2008

Jan-2010

Jan-1992

Jan-1994

Jan-1996

Jan-1998

Jan-2000

Jan-2002

Jan-2004

Jan-2006

Jan-2008

Jan-2010
Gold (Rs/oz) US$TW Index

Source: Bloomberg

Period % change to end

Gold is less
Chart 15: volatile
Gold isthat Indian
less equities
volatile that Indian equities of September 2010
200

Volatility (annualised) to end of September

50%

40%

30%

20%

10%

0%
Gold

SENSEX

BSE500

BSE200

BSE100

BSEMETL

BSEMDCAP

BSESMCAP

-10%

1 year 3 year 5 year

Note: SENSEX = BSE Sensex 30 Index, BSE500 = Bombay Stock EX 500 Index,
BSE100 = Bombay Stock EX 100 Index, BSEMETL = BSE Metal Index, BSEMDCAP = BSE Mid-cap Index,
BSESMDCAP = BSE Small-cap Index, Gold = Gold (Rs/oz).
Source: WGC estimates, Bloomberg

• A
 s an asset class, gold has outperformed selected domestic equity indices
and has provided an average annual rate of return of 37% over the five year
period ending 30 September 2010 compared to returns for the BSE Sensex
30 Index of just 1% over the same period.
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India gold report – India: Heart of gold
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Chart 16: Gold outperforms Indian equities

Gold outperforms Indian equities

Period % change to end

of September 2010
200

150

100

50

-50
BSEMETL

BSEMDCAP

BSESMCAP

Gold

SENSEX

BSE500

BSE200

BSE100

BSEMETL

BSEMDCAP

BSESMCAP
1 year 3 year 5 year

Source: WGC estimates, Bloomberg

• Inflationary pressures are expected to rise in India. Gold has the added
virtue of being an acknowledged inflation hedge. Inflation is an ongoing
concern in India as it erodes the value of savings. The individual’s
purchasing power, especially that of the lower middle class in India, reduces
significantly as they have to pay more for necessary goods and services.
According to IMF, inflation in India will average 13% and 6% in FY2010 and
FY2011 respectively.
Inflation in India and gold price (Rs/oz)
Chart 17: Inflation in India and gold price (Rs/oz)

Rupee/oz Inflation (% YoY)

60,000 20
18
50,000
16
14
40,000
12
30,000 10
8
20,000
6
4
10,000
2
0 0
Jan-1992 Jan-1995 Jan-1998 Jan-2001 Jan-2004 Jan-2007 Jan-2010

Inflation (% YoY) Gold (Rs/oz)

Source: Bloomberg
 16
India gold report – India: Heart of gold
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• R
 eal interest rates are also influencing household savings in India. Although
the base rate has recently been raised to 8.5% by the Indian central bank,
we believe that the yield on cash is still unattractive, since the real interest
rate remains negative thanks to the high inflation rate.

Gold price
Chart 18:rise as real
Gold interest
price ratereal
rise as turns negative
interest in India
rate turns negative in India

Real interest rate (%YoY) Gold (Rs/oz)

10 60000

Gold (Rs/oz) 50000

60000 5
40000
50000

40000 0 30000

30000
20000
20000 -5
10000
10000

0 -10 0
Mar-10 Mar-92 Mar-98 Mar-04 Mar-10

Real interest (%) Gold (Rs/oz)

Source: WGC estimates, Bloomberg

2. Gold Exchange Traded Funds (ETFs)

The tonnage of gold in Indian gold Exchange Traded Funds (ETFs) remains
relatively small but there have been significant recent developments with
the Indian ETF market as investors seek greater access to more liquid gold
investments. ETFs, first brought to the Indian market just over 3 years ago,
have grown in popularity as investors seek exposure to gold within a fund
structure. Total holdings from the Gold Benchmark Exchange Traded Scheme,
KOTAK Gold ETF, Quantum Gold Fund, Reliance Gold Exchange Traded, UTI
Gold Exchange Traded Fund, Religare Gold Exchange Traded Fund and
State of Bank of India (SBI) Gold Exchange Traded Scheme amounted to
approximately 11 tonnes by the end of August 2010, up 250% on June 2007
from 3 tonnes.

Although it is too early to tell whether holdings are ‘sticky’ or long-term in nature,
historic figures suggest that price corrections have not triggered significant
redemptions, but in fact have encouraged investors to increase their holdings.
An exception to this occurred in February 2009 when total Indian gold ETF
redemptions reached 40% (a decrease of 2 tonnes in holdings) due to a 15%
month-on-month spike in the local gold price during the global credit crisis.
However, this event in turn highlights the liquidity aspect of holding gold in the
form of an ETF.
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India gold report – India: Heart of gold
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Gold ETFs in India are structured to allow the inclusion of investments other
than gold for up to 10% of their assets. However, currently all the Indian ETFs
are backed by physical gold.

The recent growth in holdings and the development of new products suggests
that, after a slow start, banks and financial institutions are getting ready to
launch new gold ETFs and gold schemes in the world’s largest gold consumer
market. Most recently, State of Bank of India (SBI) and Religare innovated in
the ETF space with the launch of the SBI Gold Exchange Traded Scheme and
Religare Gold Exchange Traded Fund respectively. The WGC believes there is
a strong case for growth in gold ETFs, given the appetite for gold investment
from mutual funds and pension funds in India.

ChartGold
Indian 19: ETFs
Indian Goldand
- AUM ETFs
gold- price
AUM and gold price

Tonnes Gold (Rs/oz)

12 60,000

10 50,000

8 40,000

6 30,000

4 20,000

2 10,000

- -
Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10

Gold ETFs in AUM (tonnes) Average monthly gold price (Rs/oz)

Note: AUM = Asset under Management. *Calculated using monthly fund AUM in rupees, as reported by AMFI
(The Association of Mutual Funds in India), and average monthly gold price in rupees. This method of
calculating gold AUM is only valid whilst the above funds do not choose to diversify their assets from physical
gold holdings.
Source: WGC estimates, Bloomberg, The Association of Mutual Funds in India

3. India Post gold retail programme

In October 2008, India Post, the country’s national postal service, launched
a pilot project with the WGC and Reliance Money to sell certified gold coins
through its post office network in 100 outlets in four states (Delhi, Maharashtra,
Tamil Nadu and Gujarat). Reliance Money acts as vendor for the project, which
involves 99.99% pure gold coins in 0.5 gram, one gram, five gram and eight
gram denominations.

The India Post gold retail programme extended to 700 post offices across
India due to ongoing strong demand. In May 2010, the WGC also launched
the India Post branded gold medallion.
18
India gold report – India: Heart of gold
Revival

4. Gold-linked Microfinance scheme

The Gold-linked Microfinance scheme was initiated by the WGC in 2008 and
is an effective savings instrument in the rural part of India, which is the largest
proportion of the Indian population. According to Basic Statistical Returns
(BSR) and RBI, only 21% of rural India has access to formal financial services
due to lack of physical and social infrastructure in rural area.4

Currently, WGC is running projects in India in association with The Muthoot

Pappachan Group under the “Swarna Varsham” Scheme and also with the
Kshetriya Financial Services (KGFS) of IFMR Holdings Pvt. Ltd. and Mimo
Finance of Mimoza Enterprise Finance Pvt Ltd.

This scheme helps to make good quality gold accessible and, more importantly,
affordable to the daily wage earners like agricultural labourers, vegetable
vendors, fisherwomen, etc who comprise the Bottom of the Pyramid (BOP)
in the Indian population segment. These individuals have the desire to save
in gold, not only to preserve their wealth against unexpected calamities, but
also to fulfil their future family obligations, such as a daughter’s wedding, the
purchase of a new housing shelter or funding their children’s education.

The Microfinance scheme will encourage the habit of saving and investing in
asset classes like gold for the BOP segment as they gradually move up the
pyramid in the long run. Currently, there are more than 150,000 customers
enrolled with the Muthoot Pappachan Group under the “Swarna Varsham”
Microfinance Scheme through 630 branches across all four states in South
India and in certain parts of North and West India.

We expect that increased accessibility and the availability of new gold

investment products will act as a catalyst for further growth in Indian gold
investment demand. We believe Indian investors are likely to save more and
increasingly be more cautious in their investment decisions. We also believe
that Indian investors will continue to move into gold as an insurance policy to
protect their wealth in the aftermath of the global financial crisis since there are
few assets that have the ability to hold their value during extreme conditions.
Over the medium term, even as economic conditions improve, uncertainty is
likely to remain high; not just economic uncertainty, but also currency and
inflation uncertainty. That uncertainty is expected to be favourable for gold as
an asset class amongst Indian investors.

4
BSR – 2008, Reserve Bank of India
 19
India gold report – India: Heart of gold
Revival

Decorative and Industrial demand

Since 1992, approximately 22 tonnes of gold per annum have been used in
domestic decorative and industrial applications. This sector accounted for
nearly 3% of Indian gold demand in 2009. Industrial and decorative demand
for gold in the country is driven primarily by the use of jari, a gold thread used
in clothing (particularly in the weaving of wedding saris).

Chart
Gold, 20: and
Rs/oz Gold, Rs/oz
total and total gold
gold decorative decorative
and industrial and industrial
demand, demand, tonnes in India
tonnes in India

Gold decorative and industrial demand (tonnes) Gold price (Rs/oz)

35 60,000

30 50,000

25
40,000
20
30,000
15
20,000
10

5 10,000

0 0
1992 1994 1996 1998 2000 2002 2004 2006 2008 1H 2010

Indian gold decorative and industrial demand (tonnes) Gold (Rs/oz)

Source: WGC estimates, GFMS, Bloomberg

The rise in the price of gold over recent years has had a mixed impact on
these two components of demand. Demand for jari has been steadily eroded
by budget constraints as the rising price of gold has underpinned a trend for
substitution to more affordable ‘artificial jari’. Demand for gold used in plating
salts, however, has responded more positively to the rise in the gold price in
recent years. Demand for costume jewellery has been boosted by the rising
price of gold. Given the relatively low weights of gold that would be included
in a plated jewellery set compared with a pure gold set of the same design,
costume jewellery sets are much more affordable to the majority of budget-
conscious Indian consumers. This is because the value of the gold contained
in these products is low compared to the value of the product, thus the use
of gold in these applications is deemed price inelastic. However, the decision
to move into imitation or plated jewellery is typically made by necessity, rather
than choice. The imitation gold jewellery that is produced in India is not the
equivalent of costume jewellery in the west – it is a very close copy of 22k
jewellery and the desire of the Indian consumer is to own the real thing, but
affordability may dictate otherwise.

There is also growth in the electronics manufacturing sector in India, particularly

in regions such as Bangalore and this may well provide an additional driver for
gold demand in the coming years. This will be based on gold-bearing materials
 20
India gold report – India: Heart of gold
Revival

in electronic microchips, connectors and contacts. Indian consumer demand

for products and devices like the iPhone, which contains these components
will be supportive of this trend.

We believe that there is room for recovery in this sector. The recent demand
performance is seen as a trough, given the increasing acceptance of higher
prices, the recovering global economic outlook and improving domestic living
standards.

Gold Imports
Indian gold imports play an important role in the domestic gold market since
India currently produces around 0.5% of its annual gold consumption. The
value of annual gold imports increased by 1,015% between 1992 and 2009.
In 1992, gold imports were approximately Rs88bn, this increased to Rs881bn
by the end of 2009. The WGC believes that anecdotal evidence regarding
current gold demand trends in India indicates a robust year-on-year recovery
in imports from 2009 levels.

Chartgold
Indian 21: import
Indiancosts,
goldRupee
importbn,
costs, Rupee
and gold bn,Rupee
price, and gold price, Rupee

Gold (Rs/oz) Gold imports (Rs bn)

Gold imports (Rs bn) 60,000 1,000

1,000
50,000
800
800
40,000
600
600
30,000
400
400 20,000

200 200
10,000

0 0 0
04 2006 2008 1992 1994 1996 1998 2000 2002 2004 2006 2008

Gold (Rs/oz) Import cost (Rs bn)

Source: WGC estimates, GFMS, Bloomberg

 21
India gold report – India: Heart of gold
Revival

Seasonality and Monsoon rains

Seasonality

Aggregate Indian gold demand has an underlying seasonality. However,

demand in each state seems to be dictated by its own marriage, monsoon
and harvest season. The Hindu calendar is marked by a series of religious
festivals and auspicious occasions for buying gold which are unique to each
individual state. Similarly there are a number specific days that are considered
inauspicious for gold purchases. Based on our observation of historic trends,
the most active gold jewellery buying period is during the winter wedding
season, from beginning of September to March.

Although there is no perfect rule of thumb to seasonality, our analysis of five-

year and ten-year average seasonality trends, to year-end 2009, shows that
January, February, September and November have been the strongest months
for the rupee gold price.

Chart
The 22: The
average average
monthly monthly gold
gold performance performance
in Rs/oz in Rs/oz2009
ending December ending December 2009 (MoM%)
(MoM%)

%MoM
15%

10%

5%

0%

-5%

-10%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 average 5Y average 10Y average

Source: WGC estimates, Bloomberg

22
India gold report – India: Heart of gold
Revival

Monsoon rains

Historically, Indian gold demand has also been impacted by the monsoon rains.
This is because they provide the main source of water for more than half of
Indian farms and the return of the rains boosts rural incomes. During the first
half of 2010, news of a good monsoon season and weak stock performance
partly set the scene for the recent improvement in gold demand.

We expect local consumers and fabricators will now increasingly be purchasing

or restocking on dips in the gold price rather than during the traditional
auspicious period, weakening the influence of seasonal factors. In the past,
local consumers have typically been reluctant to purchase gold during periods
of high volatility for fear that they buy and then find that the price falls. However,
the ongoing strengthening in the local gold price seems to have increased price
expectations among domestic consumers and may have encouraged buyers
to accelerate their purchases in anticipation of a further price appreciation. For
example, local consumers have recently been buying gold even in inauspicious
times such as the Hindu’s Pitrapaksha period in order to avoid the rush and
potential rising price during the Navratri, Dhanteras, Diwali festivals and the
Non-Resident Indian wedding season later in the year.

ChartRainfall
Actual 23: Actual rainfallExcess
with Normal/ with normal
rainfall,/ excess rainfall,
%, and Indian gold%,demand,
and Indian gold
Rupee bn demand, Rupee bn

% of long period Indian gold demand

average rainfall (value, Rs bn)
90 1,200

80
1,000
70
60 800
50
600
40
30 400
20
200
10
0 0
1992 1994 1996 1998 2000 2002 2004 2006 2008

Actual rainfall with normal / excess rainfall (%)

Indian gold demand (value, Rs bn)

Source: WGC estimates, Ministry of Agriculture, GFMS, Bloomberg

 23
India gold report – India: Heart of gold
Revival

Central bank – the Reserve Bank of India

Recent developments have seen the Reserve Bank of India (RBI) purchasing
200 tonnes of gold from the IMF as a result of partially restoring a prior
relationship within its reserves. The deal was completed in October 2009,
when the gold price was trading around Rs 49,000/oz (or US$1,048), and
was announced in early November 2009. The IMF had identified 403 tonnes
of gold for sale to other members of the official sector community and the
RBI was the first institution to take up the offer, buying almost half of the
entire amount for sale. Since 1998, the RBI’s holdings of gold had remained
unchanged at 358 tonnes until the purchase in Q4 2009 when gold reserves
rose by 56% to 558 tonnes5.

The RBI’s action has reinforced the perception among Indian consumers that
gold is reliable and may have helped to reinforce the belief that prices are
well supported at this level for the long-term and, as a result, may underpin
the continued positive sentiment of Indian consumers towards gold on behalf
of Indian consumers. The RBI’s gold reserves accounted for 7% of RBI’s total
reserves of US$284bn as at the end of June 2010, although this is still below
the recent recorded peak of 9% in Q2 2000. For gold holdings to return to
this level, we believe the RBI would need to purchase around 90 tonnes at
today’s gold price.

Table 1: Proportion of Gold in official reserves (June 2010)

Description Reserves (US$bn) Gold (tonnes) Gold as %

US 424 8,134 72%

Euro area 698 10,793 58%

Switzerland 260 1,040 15%

UK 75 310 16%

India 284 558 7%

Russia 475 726 6%

Saudi Arabia 444 323 3%

China 2,577 1,054 2%

Japan 1,076 765 3%

Source: WGC, IMF (World official gold holdings as at the end of June 2010, September 2010 Report)

The RBI like most other central banks has substantial holdings in US dollars
and Euros. Over the past 2 years, the US dollar has depreciated against the
Indian Rupee, as well as against other major currencies such as the Yen,
Sterling and the Euro, and has not fared well as a preserver of capital. As
illustrated earlier, gold has historically been an effective hedge against the
depreciation of the US dollar.

With ongoing uncertainties surrounding the world’s major currencies, the

WGC believes the search for alternative international asset choices within the
central bank sector should clearly involve a consideration of gold.
5 
IMF (World official gold holdings as at the end of June 2010, September 2010 Report)
24
India gold report – India: Heart of gold
Revival

Recycled gold supply

Since 1992, Indians have recycled an average of 92 tonnes of gold per
annum. In 2009, the supply of domestic recycled gold rose 29% to 116 tonnes
while domestic gold demand fell by 19%. Historically, recycling activity has
been sensitive to general economic conditions, the price of gold and price
expectations. This is attributable to the fact that gold functions both as savings
and as a form of money in India – i.e. gold is a tradable, liquid asset. However,
we believe that amidst the recovery in domestic gold demand, a considerably
higher price will be required to stimulate another wave of recycling activity to
flush out additional supplies of old gold.

Chartgold
Indian 24:demand,
Indian gold demand,
recycled recycled
gold and price gold and price

(Indexed 1992 =100)

530

480

430

380

330

280

230

180

130

80
1992 1994 1996 1998 2000 2002 2004 2006 2008

Recycled gold Indian gold demand Gold price (Rupee/oz)

Note: Indian gold demand and recycled gold in tonnage terms, Gold price (Rs/oz)
Source: WGC estimates, GFMS, Bloomberg

In the long-term, we believe that recycling activity will continue to play an

important role in the domestic gold market especially given the substantial
estimated stock of over 18,000 tonnes owned in India. Sales of existing
gold assets give consumers the benefit of liquidity and recycled gold is also
expected to continue to provide flows of gold supply to meet demand.

Conclusion
This first report in our series has focussed upon the history of Indian demand,
together with recent developments underpinning its revival during 2010.
Gold is an integral part of daily life in India; the demand outlook which will be
explored in a subsequent report is strong, and it is abundantly clear that India
will remain pivotal to the global gold market.
Disclaimers
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WGC-HO-GEN-029 10 November 2010