05.08.05
By Andy Mukherjee
If John Maynard Keynes were alive today, he would be horrified to see gold rallying again and for a reason very familiar to the British economist: India's "ruinous" love of the "barbaric relic".
Almost 100 years after Keynes used those words to chide India for its extravagance, the billion-people nation shows no signs of losing its fondness for the metal. India accounts for 18 per cent of world demand, more than any other country.
With the US dollar looking vulnerable again against the euro and the yen, it's fertile ground for speculators to drive up the precious metal. They say demand for gold is bound to rise amid the resumption of the Hindu wedding season in two weeks after a month's hiatus for religious reasons.
Prices have risen to about US$437 an ounce ($632) in the past week on the Comex division of the New York Mercantile Exchange.
Gold traders are not the only ones betting on Indian wedding demand.
General Motors' Indian unit is trying to whip up demand by throwing in a free gift of 30,000 rupees ($1000) worth of gold jewellery with every Chevrolet Optra sold.
"Plush leather seats, jewel-effect headlamps and heaps of gold for your wife," says the GM ad.
Gold demand is rising when most of the traditional reasons for hoarding the metal - high inflation, persistent rupee depreciation, rapacious taxation and low penetration of banking services - are fading.
With increasing modernisation and urbanisation in the nation, the proportion of gold in the bridal trousseau should also have been waning. However, India's gold consumption rose 57 per cent from a year earlier in the 12 months ended March 31, on top of a 63 per cent jump in the previous year.
"Gold holdings among Indian households at market value are about 2.5 times the current equity holding of US$80 billion," said Chetan Ahya, a Morgan Stanley economist. In other words, about US$200 billion, or the equivalent of 29 per cent of India's gross domestic product, is locked up in jewellery.
Economists continue to debate whether Indian demand is excessive - and social activists ask what it will take to end the continual harbuttment of brides for dowry more than four decades after the practice was outlawed in 1961.
The question is whether Indian demand will stay strong enough to push prices even higher. After all, Indians are no longer living in the 1970s when they were hard-pressed to protect their savings.
India is now the world's 10th-biggest economy. The top tax rate is a reasonable 30 per cent, while local inflation has averaged 5 per cent since early 2000.
India has also liberalised gold imports, reducing smuggling of the metal and rendering anachronistic the plot lines of 1970s-era Bollywood movies that featured gold-smuggling heavies.
Why, then, are Indians still so enamoured of gold?
Blame it on the Government.
Ahya says that inefficient allocation of savings by the Government may have prompted individuals to become more risk averse and stock up on gold.
A true test of Indian consumers' love of gold will be when the country fully opens its capital account and citizens are free to hold their wealth in any currency.
Since that's at least a few years away, focus in the interim will swing to India's youth bulge.
India's latest census shows that more than 47 million girls in the age group of 15 to 29 have yet to marry. buttuming 80 per cent of them do so in the next five years, that's 38 million weddings. At a modest 10g a wedding, that will translate into 76 metric tons a year, enough to buy a fifth of all gold mined in South Africa last year.
It's a good thing Keynes isn't around to see that.
- BLOOMBERG
