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Reducing demand for Gold in India

I recently went to a wedding in India, where the bride got a laptop, a plasma television and mutual fund units besides seven gold coins, dainty gold chains, pendants and bracelets as a gift from her parents. In the early generation, the bride used to get five hundred grams of gold alongwith some agricultural land from her parents. This clearly shows the reducing importance for gold in the current youth. The unchallenged place of gold jewellery in Hindu weddings made India the world's largest consumer of the metal. But soaring prices resulted in upstart gadgets replacing gold jewellery in the wedding dowry.

India is the largest consumer of gold in recent times, anywhere between 800 to 900 tonnes worth $6-7 billion annually. This is sure to surprise many considering that India is considered a very poor country with one of the lowest per capita incomes in the world. India is estimated to hold more than 11,000 tonnes of gold.

70% of the population lives in rural India where agriculture is the main activity. 65-70% of the gold purchase is done in the rural areas, which is largely dependent on agriculture although agriculture forms only about a third of our GDP. Agriculture is highly dependent on the rains and hence the rural disposable income is quite dependent on the weather. A good year for agriculture assures higher demand for gold as in 1998-1999. Additionally gold has less competition from other avenues for savings and they would not trust the new-fangled vehicles like mutual funds anyway. Rural folks are very conservative.

Demand for gold in India is declining now, after the yellow metal made a historic high of Rs 11,500. Buyers and dealers are waiting for a gold-buying opportunity below the Rs 11,000/- level. People think the gold price has been too high, and the psychological level of below Rs 11,000 has to happen for active sales to pick up. In global markets, gold prices have been up on short covering but 3 percent down from its all time high of $914 an ounce. The yellow metal had rallied on hopes of a hefty rate cut at the end of January in the US that could dim the dollar and heighten the appeal of gold. Domestic production of gold is only about 2 tonnes per annum. The net gold de-hedging in the second half of 2007 was between 1.5 million and 2.5 million oz globally.

"About 20-30 years ago, a middle-class wedding trousseau had an average of 100 grams of gold. Now it has fallen to 70-80 grams," said Ajay Mitra, managing director-India of the industry-funded World Gold Council (WGC). "Televisions, cars and cell phones have crept into a woman's marriage." While jewellery is losing appeal, it is not as if gold itself has lost any shine. Rising incomes have ensured that the base of gold buyers is getting bigger, an analyst said. WGC figures show India's gold imports rose 7 percent in 2007 to 773.6 tonnes.

Nineteen-year old bride, Vindhya Tiwari from Ahmedabad, said she did not want her parents to feel the financial burden of buying gold for her. "So it is simple for me -- mix gold jewellery with fake (gold) jewellery," Tiwari said referring to her attire on her wedding day last week when she wore her mother's gold jewellery with newly acquired non-gold ones.

It's just that patterns of spending and new priorities have to be made room for. Ritu Datta, an air-hostess said, she chose to buy a car with the money meant for her trousseau. "I find it senseless to buy expensive gold ornaments and keep it in safe vaults when I can buy a car and use it everyday," Datta said.

These signs of more purchasing power help to sell more gold. The heavy promotions for the gold and jewlry by the television has created a high position in people's minds. Many luxury things have become a necessity so brides may be buying less gold, but overall gold consumption may continue to increase due to Indians' fascination for the metal and more people being able to afford it now.

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