March 25, 2013 | By Tekoa Da Silva
I had the opportunity to connect recently with one of the largest bullion dealers in India, Pushpak Bullions Pvt. Ltd., for a fascinating conversation on the Indian gold market.
For context, India is the world’s largest consumer of gold, with the majority of families storing their income savings in the form of gold jewelry, coins, or gram bars. When measured against the Indian Rupee, gold broke out to new all-time highs in late 2012 (see chart below).
Of great interest during my conversation with Pushpak Bullions, was the shocking rate at which Indian families are converting their investment portfolios into gold, and secondly, the firm’s scrambling decision to begin investing in North American gold mine production to secure future product availability.
Here are my written notes from the conversation:
TD: What’s the demand like right now that you’re seeing there in the Indian physical market?
PB: Demand was strong when gold was below $1600 levels, but due to changes in duty structures expected during the budget, and now some changes in the state tax, demand has declined some. In this month of March the imports have fallen, but in January and February there was strong demand. So in March and April we see it slowing down, but the overall price forecast and trend says that gold should go down…so dealers are expecting strong demand to come in following that.
TD: Do you think demand has gone down recently because of the higher price of gold, or because of the tax?
PB: It is like adding fuel. The price started correcting below $1600, and went to $1560 or some odd dollars below that. Meanwhile, there were rumors of duties getting hiked here in India. In budget that didn’t happen, but the state tax has increased from 1% to 1.1%. Apart from that, there were some internal rules coming in for buying gold with respect to various black money, white money [money laundering], and different laws. People were just awaiting those laws to settle, and that has happened. So I think now it will return to normal, by the second week of April.
TD: Do Indians view gold as more of a tradition, or do they view it as an investment also?
PB: Things have changed in the last couple of years. The Indian community used to only buy gold as a traditional or cultural family event, but in the last couple of years it has become a part of investment as a whole. Mutual funds, individuals, families…try to build up their investment portfolios now by having a larger part in gold. Initially it was 2%-3%, but now it has risen to 25% since gold has given strong returns over the last 5-7 years. It has become a safe haven when people see the dollar crisis, the euro crisis—they start believing that yes, gold and silver will be the ideal thing to invest in.
TD: So what you’re saying is that you’re seeing families and people coming in—and they’re selling their stocks and their stock market investments, and they’re saying, ‘I want to buy gold’?
PB: Yes. See, the gold ETF concept was initially developed here in this country…but it did not move up because Indian investors had a psychology that they need to have possession of their metal instead of it being in a certificate form. But now that is changing. Initially there were people only willing to buy jewelry. Now they understand the importance of investing in bullion, gold coins, medallions, bars, etc. They recognize it has a good resale value, it is a ready cash and can be liquidated very easily. And they understand that it is a hedge against inflation also. So they have started accepting buying small denominations of gold every quarter of half-year when they have some money saved. In response to this new demand, we will be opening four new retail outlets in Mumbai in April, which will have total focus on investment jewelry and bullion products.
TD: What about Silver? What is the opinion of silver by the Indian market?
PB: If you want to earn some yield from the commodity, silver is the right choice. Silver used to not feasible for Indian investors because there were only 31 kg LBMA bars coming into the country, and they were not getting refined into smaller denominations. Now we [our firm] have managed to produce and manufacture silver bars right from 25 grams to 1kg bars. So there is good demand coming now in silver. But again, due to the different tax structures in different states, the silver business has not grown as well as gold. If you compare internal states, there are differences of more than 2% on taxes. So you might see high demand in the state of Gujarat, but very low in Maharashtra due to these tax structures.
TD: So you said that Indians now look to have 25% of their portfolio in gold—but how many Indians already have that percentage in your opinion? 5% of the country? Or 10%?
PB: Indians are active buyers of gold, but adding gold as an investment in their portfolios—only about 15% of people are already practicing it, but many more are getting convinced or are in a transition period of doing this. This is also because of their bad experiences with dollars, the stock market, or any other commodity which is more volatile or not safe. But they feel safe and confident holding gold and silver.
TD: Wow, that’s interesting.
PB: Yes. I see a future coming where the jewelry shops here in India will also have a payment option as an ETF or digital credit to take delivery of gold. You transfer your gold units to our accounts, and you only pay the labor cost for your jewelry. So that will be coming, but it will take some time for the systems to attract interest.
We are also adding presence in the USA. We are involved with some precious metals mining production in the state of Arizona. In this country a bullion or a jewelry dealer does not traditionally do that—but we are. That is how we diversify our business, and in future years we want to have a one-stop solution that is right from the raw material to the finished jewelry—we will have our own complete setup.
Bottom Line: As the currency crisis bounces from one country to the next, some populations will be prepared. A prepared populace is a rational populace, and it appears that the Indians, the Chinese (and our readers of course), are leading the way.
On the other hand, if a national population owns no gold or other hard assets, and survives only by the whims of a fragile financial system—watch out. The slightest shock could create absolute havoc.
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Tekoa Da Silva
Bull Market Thinking