Demand for gold in India expected to grow faster to 1,200 tonnes by 2020: World Gold Council
Moneylife Digital Team 04 April 2011

High prices have not slowed demand; gold as investment will have to compete with a wider range of options

India's cumulative annual demand for gold is expected to increase to over 1,200 tonnes by 2020, an estimated growth of 30%, according to the World Gold Council (WGC). This is valued at about Rs2.5 trillion at current prices.

The WGC stated in its report, "India: Heart of Gold", which was published last week, that gold demand in the country has grown by 25% over the last decade, despite a 400% rise in prices.

Rapid growth is improving incomes and savings, which has led to greater gold purchases. In 2010, total annual consumer demand was 963.1 tonne.

A significant part of this demand comes from a growing middle class that is 64 million strong, a rising savings ratio of 30%-40% and a strong cultural affinity for gold, according to the WGC. Increasing income is expected to increase gold purchasing power by about 3% per annum.

India accounts for 32% of global jewellery. Gold jewellery contributed around 75% of total gold demand in the last decade and more than 50% of this buying has been motivated for investment purposes. Indians hold the largest stock of gold in the world, and 18,000 tonnes of this is held by households.

Around 50% of the country's total population is under the age of 25, so it is expected that there will be approximately 15 million weddings per annum over the next decade. Gold is an integral part of weddings and this will drive around 500 tonnes of new gold demand per annum, together with a further 500 tonnes of existing gold being gifted by one family to the next.

Globalisation has brought various changes in Indian consumers' tastes with buyers looking for jewellery accessories in the range of 18 to 22 carat.

The rural agriculture sector accounts for more than two-third of gold demand. The sector is currently growing at less than 1% per annum and this is expected to increase at 5% per annum with increasing purchases in rural communities.

Dr R Kannan, vice chair of the Solvency Sub-committee of the International Association of Insurance Supervisors, says that the gold demand in India is influenced not only by prices, but by macro-economic, monetary and policy variables that include income, interest rates, exchange rates, personal income-tax, government spending and wealth.

WGC says that in the last five years future gold purchase intent in India has remained demonstrably stable, in spite of rising gold prices during the period.

Gold has also become an integral part of India's currency reserves. The share in total reserves declined over the past decade due to the growth in dollar-denominated assets. Between 1996 and 2001, Indian gold sales were broadly stable in value terms, averaging Rs284 billion per annum. However, Indian jewellery demand surged to 745.7 tonne in 2010, 13% above the previous peak in 1998, because of rising gross domestic product (GDP) and the removal of import controls.

However, the young generation today has many investment options and this could still be a major challenge for gold. The desirability for gold will need to be sustained, as consumers will be increasingly influenced by Western luxury goods and investment markets.

In view of the Reserve Bank of India's policy of encouraging Indian savers to hold less physical assets (gold and property) and to increasingly hold financial assets, the financial services industry will need to introduce sustainable gold-based investment solutions in the market.

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