China's gold demand may overtake India's by 2014, giving the world's most populous nations two ounces of gold in every five sold worldwide
GOLD prices rallied in the last quarter of 2010 on continued concerns about sovereign debt in Europe -speculation about the state of finances in Ireland, Spain and Portugal -as well as Standard & Poor's (S&P's) warning of potential further downgrades to Greek debt in early 2011.
Economic uncertainty and the desire for protection from currency volatility led some investors to turn to gold as a real asset and store of value.
Indians are known for having an affinity towards gold. This has clearly been illustrated in our gold consumption in the form of jewellery demand year-on-year. Despite gold price rising to an all-time-high in both India and abroad, 2010 was no exception.
Early estimates by Credit Suisse indicate that Indian consumption rose by 20 per cent to 25 per cent year on year.
Winds of change: An interesting pattern that is developing in the gold market is the appetite of Chinese investors and consumers, which has seen a sea change during the past few years. At this pace, Chinese demand for gold may overtake India's by 2014, giving the world's two most populous nations two ounces of gold in every five sold worldwide that year. Already, this further eastwards shift is showing in global gold prices.
In India, gold demand typically peaks with Diwali, the biggest festival in India, in November coinciding with the post-harvest wedding and festival season. Chinese households, on the other hand, ramp up their gold buying around Chinese New Year (starting on February 3 in 2011) and as the hump in global demand is moving from Diwali to Xn Nián, so too is the annual peak in the global gold price. Beijing started liberalising its domestic gold market a decade ago, first with the end of jewellery price controls in 2002, and then with the launch of Shanghai's bullion-trading exchange in 2005.
Diwali has since lagged the average quarterly gain during this bull market, whereas the following three months, in contrast -the period leading up to and including China's New Year and Lantern Day festivals a fortnight later -have strongly outperformed. Both Indian and Chinese households are also switching to more efficient forms of gold investment, continuing to accumulate jewellery, but choosing coins and gold bars for a growing chunk of their holdings. What is also being noticed now is that gold is fast becoming a popular investment option.
Where to invest? With fundamentals favouring increased gold demand, and hence, higher gold prices, we believe that gold should have a 5 per cent to 15 per cent allocation in all portfolios as it provides the dual benefits of asset class diversification, while also being a very viable investment option. This exposure can be increased or decreased depending upon the risk appetite of the investor.
Exposure to gold can be achieved in various forms, through physical gold (gold bars or coins), exchange-traded funds (ETFs) or mutual funds that invest into gold mining companies. While physical gold gives investors tangible exposure to gold, it presents challenges in terms of storage, security as well as unfavourable taxation. ETFs eliminate these disadvantages and provides access to economic value of gold. Mutual funds investing in shares of gold mining companies, on the other hand, benefit from price appreciation in shares of gold mining companies, which in turn benefit on account of operating leverage due to rising gold prices.
Any change in the price of gold gets reflected in the profitability of the mining company and subsequently on its stock price. A good way to reduce equity risk and associated volatility is by making regular investments through a systematic in vestment plan (SIP), which is a disciplined way to create wealth.
Outlook: Today's gold price still sits below the 1980 peak of $2300 per ounce when adjusted for inflation. The drivers for higher bullion prices are higher demand and stagnant supply. We believe that beyond owning physical gold, the most interesting investment opportunities are on the supply side, that is from gold mining companies.
With Chinese demand increasing and limited domestic gold production, the gold mining producers outside of China will see benefits, even if gold's price remains stable.
