Indians cash in on high gold price

www.atimes.com By Abhrajit Gangopadhyay BANGALORE - All roads in Mumbai, the commercial capital of India, these days lead to Zaveri Bazaar, where office orderlies rub shoulders with software professionals in the long queues lined up to sell their gold holdings for record prices at the jewelry stores massed in the market. People are selling off their heirloom gold ornaments - traditionally cherished among Indians - and coins as war fears in the Middle East have propelled gold prices to new heights over the past few weeks. Expat Indians are also pumping in forex exchange and converting part of their asset holdings into gold as they seek a safer haven for savings. The London-based Gold Fields Mineral Services (GFMS) an independent consulting company, forecasts that the price of gold will stay above US$370 per ounce (where it has been for the past weeks) if the US-Iraq crisis develops into a long war. And as has already happened, the high gold price will affect demand for gold jewelry in price-sensitive markets such as India. In its latest survey, GFMS said, "If the Iraqi crisis blows up into a lengthy war, we could easily see the market at over $370. There is a possibility of gold jewelry demand picking up in India in the first half of 2003, provided prices ease below $340, and only in comparison to a poor first half of last year." The $370 level for gold was last seen in March 1996. Investors are diverting their funds to precious metals not only on war fears, but also because of sliding equity markets and the weakness of the dollar in forex markets. "If we don't see prices easing back to more like $330 and, instead, they hold at over $350, we could easily see fabrication during the first half of 2003 slumping below last year's low levels," GFMS said in the survey. GFMS added that total gold fabrication had declined by over 10 percent during 2002, mainly as the price rise led to a slump in jewelry manufacture in markets such as West Asia and India. The price of gold has risen 25 percent in the past year. Mirroring gold in its rise is platinum. Prices for the metal rose to a 17-year high last week. Concerns over a supply disruption from Russia and South Africa, the two largest producers of the metal, had led the price rally. In India, the sharp rise in scrap supply and zooming global prices have severely crimped Indian gold imports during the current high-demand marriage season, which started last week. Jewelers are buying old ornaments at a discount to current prices and recycling them, instead of using new gold bars, traders said. Imports account for more than two-thirds of Indian gold consumption, the largest in the world, and these are declined with the rise in price. Daily gold imports into Jaipur, a leading bullion trading center in the country, are expected to slip to just 100 bars (of 116.64 grams each) - from about 500 bars in recent weeks. Jaipur usually imports an average of 3,000 bars a day. Jewelry sales down Sales of gold jewelry, which account for 85 percent of Indian gold demand, have fallen sharply due to volatile prices, traders say. However, compulsory buying, such as for weddings, will continue to take place despite volatile prices, traders said. Gold jewelery is an essential part of Hindu marriages, when parents gift it to their daughters for financial security. The wedding season begins in mid-January and ends in March. Domestic gold sales for July-September - the latest figures available - fell 8.5 percent year-on-year to 116.4 tonnes. Imports fell 12.3 percent to 87 tonnes, according to the World Trade Council. Driven by fears that a war in Iraq may force them to repatriate, Indians based in the Gulf are sending their money home, swelling foreign exchange reserves to record levels and shoring up rupee sentiment. India's forex reserves, the world's seventh-largest at $73.2 billion and equivalent to 14 months of imports, could top $80 billion by March, analysts said. Gold reserves are $3.444 billion. For overseas Indians, their banking system offers a safer refuge than the Gulf, even though India suffers from its own problems with political risk. More than 3 million of India's 20 million overseas population work in the Gulf and interest rate differentials of nearly 200 to 250 basis points between the rupee and foreign currency deposits were an added attraction, traders said. The record reserves have encouraged global rating agency Moody's to declare that it may raise the country's forex debt rating from "Ba2" in February. Such an upgrade would further boost inflows from expatriates and foreign investors buying Indian assets, traders said. Overseas workers also draw comfort from India's dismantling of some its archaic capital controls, making forex repatriation easier. Rising rupee Expatriates' remittances and rising trade inflows helped the partially convertible rupee to rise 0.55 percent against the US dollar in 2002, its first annual gain in more than a decade, and 2.3 percent to 47.94/95 from its all-time low in mid-May. Data from the Reserve Bank of India shows that expatriates' deposits rose nearly $1.6 billion to $26.73 billion in the first six months of the current year to March. In the December quarter, deposits may have grown by $1 billion to $1.5 billion after an aggressive rate cut by the US Fed Reserve in November, traders estimate. Their remittances are expected to exceed another $1.5 billion before the financial year ends in March. Traders said that the large unhedged positions of Indian companies that raised forex loans could pose a problem if there were a sudden reversal in sentiment on the rupee, or a war broke out in the Gulf and sent oil prices soaring. Also, importers are loathe to hedge their requirements because of a weakening dollar and the comfortable external position, including a current account surplus of $1.34 billion in the July-September quarter - the third straight quarter of surplus. India imports 70 percent of its crude oil requirements, which form two-thirds of the annual import bill of nearly $60 billion. Oil has stayed above $30 a barrel in recent weeks due to fears of a US-led war in Iraq and a strike in Venezuela. "We could see an outflow of $8 billion to $10 billion in a matter of weeks as importers will rush to cover and the effects of the relaxed capital controls are seen," said a treasury head at one leading private sector bank. (©2003 Asia Times Online Co, Ltd. All rights reserved. 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