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South African gold companies pushed into survival mode
Analysts Expect Indian Plan
to Tap Idle Gold to Move Slowly
From Reuters via The Peninsula
Doha, Qatar
Sunday, March 27, 205
http://www.thepeninsulaqatar.com/Display_news.asp?
section=Business_News&subsection=market+news&month=March2005&file=Bus
iness_News200503272282.xml
MUMBAI -- For housewife Arpita Mohan, giving up her gold ornaments
in exchange for a certificate is the last thing she has on her mind.
"I feel good seeing myself in a mirror wearing a lot of jewellery,"
she said from Allahabad. "Given a choice, I will never prefer a
certificate. I will choose gold jewellery, wear and sell whenever
there is a need."
And like Mohan, traders and analysts said that there are thousands
of Indian households who would be reluctant to give up their gold to
take part in a savings scheme introduced by the government in its
budget for financial year starting April 2005.
India, the world's largest gold importer and consumer, announced
last month that mutual funds could launch gold exchange-traded funds
to enable people to buy and sell gold in units as small as about $2.
The units can be listed on stock bourses. Details of the scheme are
still being worked out.
Analysts say the move aims to attract investments in the metal from
other sectors and tap into the 15,000 tonnes of idle gold -- mainly
in the form of jewellery and coins accumulated by households over
generations -- for productive purposes.
Although some see the scheme as a positive move, many feel the
government has a tough job at hand.
"Gold is more than a metal in India. It's a culture. It's a part of
life," said Ranjeeth Rathod, a bullion dealer.
"And if a gold scheme takes away that culture from the Indian
community, I don't know how successful the scheme would be."
Gold exchange funds, commonly known as "paper gold" are traded like
stocks and holders are not required to physically buy gold. The
value of the unit changes with the metal price.
India, home to more than a billion people, imports about two-thirds
of its annual gold needs of up to 700 tonnes. Jewellery and coins
account for 85 percent of the country's gold demand.
Jewellery forms an important part of Indian weddings, as parents
give their daughters the metal for financial security. Hindus
consider gold an auspicious metal and like to buy or gift it during
religious festivals.
"I can't tell you that instead of a gold ring, I will give you a
certificate that you can wear around your finger," said Rajesh
Mehta, India's largest exporter of gold jewellery.
But there are many who see a silver lining in this.
"Instead of having a preconceived notion about the cultural
background, such innovative instruments should be tried out before
predicting their success or failure," said Rajan Mehta, executive
director of Benchmark Asset Management Company.
The company sought the nod of the Securities and Exchange Board of
India, the market regulator, way back in 2002 for gold exchange
traded funds, but did not get an approval.
It has again applied for approval.
"We feel that the structure of the scheme is quite superior and
gradually people will realise that."
Industry experts say lack of awareness in such schemes and other
modern investment plans and limited reach of banks and mutual funds
in the country, where more than 600 million people live in villages,
would restrict the popularity of the gold fund.
"It will take some time to penetrate. I don't expect very large
numbers right away," said Sanjeev Agarwal, managing director for the
Indian subcontinent of the World Gold Council.
Some say the scheme could first attract urban people who may try
investing a portion of their surplus money in the paper gold, or a
small section of investors who purchase gold bars and coins.
But rural India, which buys 70 percent of gold sold in the country,
is likely to stay away.
"Rural people still don't have adequate faith in the banking system.
How can you expect that they will be attracted toward something they
can't see?" said Dubai-based Nayan Pansare, chief financial officer
of Rosyblue Fze, a diamond and jewellery firm.
Traders say physical gold is facing a greater threat from rapid
urbanisation and invasion of consumer goods and electronic products
than the paper gold scheme.
Industry experts said if the scheme takes off, it would lift the
country's gold demand as mutual funds would be required to back the
units with equal amount of gold as an underlying asset.
The gold accumulated by the funds could be used for more productive
uses, such as lending to jewellers or to banks.
"It's better to bring idle gold into the banking system and use that
for the economic growth," said Bhargava N. Vaidya, a bullion
analyst.
The Indian economy, the fourth-largest in Asia after Japan, China,
and South Korea, needs massive funds to attain a growth target of
over 7 percent. It grew at an average of 6 percent since 1991.
The country attracted $4.68 billion of foreign direct investment
last year to March 2004, nearly half of gold bought by Indians
during the year.
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