India’s love affair with gold may be over, as prices slide

September 14, 2014 Posted by admin

* Indians opt for stocks and banks over gold

* Investment demand for gold slumps

* Modi’s financial inclusion may change saving habits

By Rajendra Jadhav and Indulal PM

VANGAL, India, Sept 12 (Reuters) – Kiran Laxman Salunkhe
used to buy jewellery during religious festivals, but sliding
gold prices have led the young Indian farmer to break with his
family’s traditional investment.

This year Salunkhe has deposited his hard-earned savings at
the bank for the first time in a decade and bought farmland.

“I bought jewellery when gold price was 32,000 rupees (per
10 grams) last year. Now jewellers won’t pay me more than 27,000
rupees if I want to sell. Why should I invest in gold,” said
Salunkhe, who farms 15 acres of sugar cane in Vangal, a village
250 km (160 miles) south of Mumbai.

“Nowadays it is risky to keep jewellery. Burglaries are
rising,” he said. “With a fixed deposit there is no risk.”

A one-quarter drop in local gold prices over the
past year has shaken the confidence of Indians in the precious
metal as a store of value and dented demand in the world’s
second-biggest buyer.

The main beneficiary has been Indian stocks, which have been
clocking up records on hopes that Prime Minister Narendra Modi
can deliver on the promise of “better days” ahead that swept him
to power in May’s general election.

Beyond short-term sentiment, a major push by Modi for every
household to get a bank account, better education and living
standards, and falling inflation expectations, could herald a
more secular change in investing habits.

“The attachment of Indians to gold will remain,” said Harish
Galipelli, head of commodities and currencies at Inditrade
Derivatives and Commodities Ltd., referring to gold’s culturally
embedded role in dowry gifts or decorating Hindu temples.

“But as the banking network expands and literacy rises,
people in rural areas will explore other investment products
like mutual funds or bank deposits. The mindset is slowly

If the national obsession with gold does fade that would
help curb India’s external deficits – gold is the second biggest
item on the import bill after oil – and cap world gold prices
that are trading sideways in 2014.


If the crowds selling scrap gold to Kapil Parekh at his shop
in Mumbai’s Zaveri Bazaar are anything to go by, the shift by
small-time speculators out of gold is continuing unabated.

“Many investors who came after 2008’s stock market crash
were short-term investors,” said Parekh.

“They came when the stock market wasn’t giving returns. Now,
since shares are rallying, they are liquidating gold and going
back to equities. They may come back.”

One customer, Dinesh Jain, said he had sold 64 grams of gold
bought since 2011 and was investing the proceeds – now worth
nearly $3,000 – in information technology stocks.

India’s investment demand for gold slumped by 67 percent in
the June quarter from a year ago to 49.6 tonnes, World Gold
Council (WGC) data showed. Based on industry and WGC estimates,
investment demand could nearly halve to 190 tonnes this year.

Investment demand was 37 percent of total 2013 gold sales.

Indian gold exchange-traded funds, a financial product that
sophisticated investors use to gain exposure to the metal, have
suffered 15 straight months of outflows.

In contrast, turnover on Mumbai’s main NSE bourse is up by
61 percent, while $50 billion has flowed into mutual funds in
the financial year starting April 1 – up sixfold from the entire
previous year.

Term deposits in Indian banks have also risen but by a more
modest $3.6 billion since April, compared to a drop of $2.9
billion last year, central bank figures show.


A decade-long surge in gold prices to 2013 led investment
buying of bars and coins to quadruple. Over the same time, sales
of traditionally more popular jewellery rose by just a quarter.

But since hitting a record high of 35,074 rupees per 10
grams in August 2013, local gold prices have fallen steadily,
tracking weakness in overseas prices and a strengthening rupee.

In the past, such price falls would have attracted bargain
hunters. Not now.

“The 11-year rally in gold prices created a perception that
they will only go up. This price fall has broken that
conviction,” Prithviraj Kothari, vice president of the India
Bullion Jewellers’ Association, told Reuters.

“Now people are diversifying their investments. This trend
will increase in the coming years,” added Kothari, cautioning
that expectations of a tightening in super-loose U.S. monetary
policy would weigh on gold.

“During uncertainly people chase gold. Now, since we have
stability, economic growth will revive. It will ultimately push
up the stock market and real estate prices.”

But for some India’s love affair with gold will endure.

“Last year, despite a premium of over $100 (per ounce over
London prices), buyers were crowding my counter,” said a
Mumbai-based dealer at a state-run bank.

“Now, the premium is just $5. The peak festive season is
ahead. But I am waiting for customers. There is no hysteria.”

(Writing by Rajendra Jadhav; Additional reporting by Suvashree
Chaudhury; Editing by Douglas Busvine and Michael Perry)

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