Indians turning towards gold, silver and crude as alternatives to equities
Moneylife Digital Team 25 July 2011

According to Macquarie, the recent performance of gold prices, increasing availability of options like ETFs, and the perception that gold is safe while equities are speculative, has attracted money flow into these instruments

"Indian god believes in gold and so do Indians!" says Macquarie Capital Securities. According to the brokerage, the recent massive find of gold worth $22 billion from a small temple in India tells you about the Indian fascination for gold. Due to this fascination, the brokerage said, it is amazed to see the steady shift of money to gold, silver and crude from equities.

The price of gold has been continuously rising over the past few years, and today, the yellow metal nudged a fresh all-time high. And Macquarie explains enough reasons for this.

"Macroeconomic uncertainty led by persistent high inflation has led to considerable amount of money flowing into the precious commodity, as investors look to protect their money's worth, but investors are not alone. Last week we realised that god is also perfectly hedged against inflation," Macquarie said in a research report.



Equity volumes are nowhere close to the highs seen back in 2007 and 2008 and are down 30%-40% compared to levels seen in 2009, the year we saw a turnaround in global equity markets. While the market has been volatile, it has not been accompanied by commensurate volumes.

Instead, excess global liquidity since 2009 has given rise to speculative interest in commodities and high inflation has diverted investor interest towards gold. Silver is another commodity that has seen tremendous buying since the second half of 2010 and has in fact surpassed gold volumes by miles in the past six to nine months. At the same time, crude continues to attract speculative interest as global geopolitics continues to be wobbly, the report said.

"Inflation has remained high in emerging economies and has started creeping up in developed economies. At the same time, recent US economic indicators have been weak and fresh concerns over European sovereign debt issues have emerged, leading to high-risk aversion in global markets. All these, coupled with loose monetary conditions, have led to high speculative interest in gold and other commodities."

For June 2011, headline inflation was at 9.44%, mainly driven by manufactured products (7.43%) and primary articles (12.22%). While food prices, up 1.9% month-on-month (m-o-m) showed no signs of receding, non-food articles surprised positively with 1.7% m-o-m decline.  

Fuel inflation came in at 12.8% year-on-year (y-o-y) as the full impact of the fuel price hike is yet to flow through. While June inflation surprised positively, the revisions made to wholesale price index (WPI) data off late, suggests persisting inflationary pressures. The government revised April WPI upwards by around 110 basis points.

Coming back to the gold story, last week, ratings agency CRISIL also said it believes that Tier-II and -III towns will drive growth for branded gold jewellery retailers over the medium term. The demand for gold jewellery in these centres is strong and growing, buoyed by increasing affluence and preference for branded jewellery. These gold jewellery retailers are expected to derive over half their revenues from such small towns by 2012-13, as against around 40% in 2009-10, CRISIL stated.

Gold demand in India has grown at an average 13%-14% annually over the past 10 years and comprises nearly 15% of total global demand. Unlike other markets, gold in India is seen more as a sign of prosperity and security in addition to being considered auspicious during festivals and weddings. In this context, gold demand in India has been quite resilient, price corrections notwithstanding, primarily driven by income growth, high savings rate and favourable demographics.

Lately, investment in gold exchange-traded funds (ETFs) has also seen significant growth in India driven by characteristics like liquidity, ease of investing, as a hedge against inflation and notably lower volatility compared to equities. According to the World Gold Council (WGC), gold ETFs in India increased their gold holdings in the second quarter of 2011 by more than 30% sequentially and 50% y-o-y.

The unearthing of massive amounts of gold, worth an estimated $22 billion (and counting), at the Sree Padmanabha Swamy temple in Kerala also confirms the huge interest in the previous metal. Questions are now being asked as to how much gold these temples might actually have.

To put things in perspective, the value of gold at the Kerala temple alone is nearly one-fourth of India's fiscal deficit, and double the value of gold held by the Reserve Bank of India (RBI). The money from the sale of the metal can feed the 410 million Indians living below the poverty line for 43 days-and that's only one temple! WGC estimates put India's gold holding at 18,000 tonnes, or approximately $800 billion or roughly half of India's nominal gross domestic product (GDP), Macquarie concluded.

Comments
Array
Free Helpline
Legal Credit
Feedback