Gold Imports to Rise in India This Year

Guest commentator TC Malhotra contributes from New Delhi.

India’s gold industry, the world’s biggest market for the metal, is likely to see a further rise in imports this year — even as the country experienced a 34.9 percent increase in imports in the first half of 2011.

According to the World Gold Council (WGC), gold imports in the first half of 2011 stood at 553 metric tons, whereas the total gold imports in 2010 was 959 metric tons, as stated in a Reuters report. The WGC had earlier reported that total Indian gold imports could touch a record 1,000 metric tons in 2011.

At the Multi-Commodity Exchange of India (MCX), gold had hit an all-time high of Rs 27,989 ($621.90) per 10 grams on Aug. 20.

India currently has only one operational gold mine. As such, India is heavily dependent on imports mainly from Australia, South Africa and Russia. Market analysts say that currently India and China are by far the biggest markets for gold in the world. However, gold plays a different role for the Indians than for the Chinese.

It is believed that India has been the biggest gold market for centuries because Indians buy gold for its role in their social, religious and cultural life. For the Chinese, however, attraction to gold is a recent phenomenon because they buy gold primarily for financial purposes.

India consumes about 800 metric tons of gold per year, which accounts for about 20 percent consumption of gold globally. More than 50 percent of this is used for making gold jewelry. However, the per-capita gold jewelry demand in India is low. The per-capita demand in India was 0.61 grams last year, although this level is below the peak levels of 0.65 grams recorded in 1998.

Pretty Jewelry, Attractive Investment

Moreover, gold is the most popular investment in the country. Indian investors generally buy gold as a hedge or safe harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). Some estimate that around 30 percent of per-capita income is saved and of this 30 percent, 10 percent is already invested in gold.

The gold market in India was freed up only in 1997, when the federal Indian government allowed banks and other government-owned trading firms to import the metal directly.

On Jan. 3, 2011, the Reserve Bank of India (RBI), the country’s central bank, allowed seven more banks to import gold and silver. With this, a total of 31 Indian banks (government-owned and private-sector banks) are now allowed to ship precious metals into the country.

Karur Vysya Bank, Punjab and Sind Bank, and State Bank of Hyderabad are some of the new banks that got permission.

Dr. Y.V. Reddy, the former governor of the Reserve Bank of India (RBI), has written in a previously published article that the RBI is neither a speaking purchaser nor a seller of gold reserves, unlike many other countries (including some developing economies, especially in Asia). RBI had used a part of gold (in parallel with government gold) for raising foreign currency resources during the balance-of-payments crisis in the early nineties. These overseas gold holdings are being used as part of reserve management to yield a return.

In November 2010, the WGC announced that India has over 18,000 metric tons of gold stocks, amounting to around $800 billion. India also represents at least 11 percent of global gold stocks.

A WGC research paper  titled “India: Heart Of Gold found that the amount of gold India has is equivalent to nearly half an ounce per person, a figure which is considerably below Western market consumption, and representing the scope for future growth.

–TC Malhotra

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