Bullion Investment Culture

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The LBMA Indian Bullion Market Forum New Delhi, 30-31 January 2003 Page 105

Building A Bullion Investment Culture

In India

Albert ChengHead, Retail Invesment, World Gold Council

Good afternoon, ladies and gentlemen. It has been almost a year since I spoke at a similar conference inDelhi, organised by the World Gold Council and supported by the Reserve Bank of India. In this relativelyshort period, significant initiatives by local authorities have changed the face of gold banking in India. I

believe that these initiatives will continue to shape the gold market in coming months and years. Somefinancial institutions have already seized the opportunity to develop the gold banking business. As further

plans are in the pipeline, I hope that a true bullion investment culture will emerge in India in the nearfuture.

Over the past 18 months I have visited India six times, to work with the local bullion trade and ourcolleagues in the country. The frequency of these visits is a sign of our commitment to this importantmarket, and they also reflect our quest to better understand the local gold investment market as well as towork out the strategies to foster its growth. I am very happy to report to you today that we have achievedsignificant progress.

I would like to share with you some of our findings regarding the Indian investment gold market, as wellas our plans for the next several years designed to nurture the gold bullion investment culture in India. Inthis process, we are fortunate to have identified the right group of trade partners. We are confident thattheir diligent efforts will contribute to the overall growth of the gold investment market in India

The gold investment market, as defined here, includes bullion bars and coins. Although the product class

of investment jewellery does indeed exist in India, we at the Council normally focus on small bars andcoins as far as retail investment is concerned. Hopefully, in the near future we can also begin to includecertain forms of gold-backed paper products that will be launched by financial institutions. It is oursincere hope that products such as gold accumulation plans, gold savings accounts, and others will

become available to the Indian buying public in coming years.

Before I move on, I should mention a particular GFMS study (commissioned by the Council in 2001).This report details retail investment demand across the world, highlighting offtake data from no less than27 countries, including India. In addition to commentary and statistics on retail investment, the report alsofeatures a study of private investor stocks, broken down by country. This would be the first time, I

believe, that such a systematic analysis of gold holdings has been made.

The highlights of the report were presented at last years conference. I am not going to reiterate themtoday, except for some updated figures on key trends. If you wish to obtain additional information, thisstudy is readily available on our website at: www.gold.org.

The relevant trend emerging from this study is quite clear: the majority of the growth in private sectorgold holdings during the past 50 years has taken place in the regions outside of Europe and North AmericaThe areas of significant growth include countries such as India, China, Japan, Turkey, Vietnam, and SaudiArabia to name but a few.


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Building a Bullion Investment Culture in India Albert Cheng


A closer look reveals that aggregate global retail investment demand totalled 2,567 tonnes in the periodfrom 1993 to 2001. With the increase in East-West trade activity over the past decade and the resultant

growth in regional wealth, gold certainly ranks among the top investment choices of newly wealthyAsians.

Of the total figure of about 2,446 tonnes of retail investment demand in the rest of the world, Indiaalone accounted for 723 tonnes,as compared to a netof 121tonnes from Europe and North Americacombined.

This clearly demonstrates the importance of India to the gold markets retail investment sector. A quickrecap of historical retail gold investment in India reveals that annual consumption of coins and bars hasranged between 90 and 105 tonnes.

Private Investor Stocks by Region,1950 vs. 2001

(at year-end, in tonnes)

1950 2001

Europe 7,000 8,910North America 2,600 3,428

Rest of World 1,300 10,002

TOTAL 10,900 22,340

Source: GFMS

Net Retail Investment Demand by Region,1993-2001

(cumulative, intonnes)

Europe -197

North America 318

Rest of World 2446

TOTAL 2567

Source: GFMS

Net Retail Investment in the Rest of the World1993-2001

(cumulative, in tonnes)

India

Japan 630

Vietnam

China

Turkey 173

Iran

Thailand 86

Saudi Arabia

Others

723

256

175

83

69

251

TOTAL 2446

Source: GFMS


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It is also worth mentioning that these statistics do not accurately reflect the true investment intent ofIndian consumers. Purchases of gold jewellery for investment purposes have been historicallycommonplace, and more so since the advent of gold controls. However, it is very difficult to estimate theactual quantity of such investment jewellery offtake in our demand estimates.

The average annual consumption of about 100 tonnes of gold coins and bars is facilitated by a well-established jewellery network in India. The majority of these coins and bars are manufactured within the

country and are sold with minimal advertising expenditures, presumably without a clear, pre-definedmarketing strategy. A large part of these coins and bars have been sold on the strength of religious motifs.The distinction in the investment motive of the consumers in buying gold coins versus jewellery isfrequently blurred.

In order to better connect with our target consumerss demographic profiles, as well as to betterunderstand the motivatorsand deterrentsinvolved in gold investment product purchases, the World GoldCouncil commissioned a market research study in mid-2002.

Research findings confirmed that consumer interest in gold remains high. Gold is clearly seen as thepreferred savings and/or investment vehicle by our target audiences. Gold bought for investment purposes,(in many different forms), is of significance in most portions of the population strata included in the study.

The buying of gold coins and bars is often regarded as a precursor to an eventual jewellery purchase.

However, the research also reveals that thepotentialto make gold coins and bars become the preferredchoice (aside from saving deposits) among Indian investors, is extremely high. This process however,requires a serious consumer education effort and, of course, the right products, offered through non-traditional (non-jewellery) channels.

A simplistic way to estimate the potential size of the Indian gold retail investment market is to examinethe pool of savings funds present in the system. We are specifically referring to bank saving deposit andCD, since these types of funds are more likely to find their way into alternative assets. The reasons mayvary from low interest paid on the account, to more attractive opportunities in other assets. If only 1% ofthe savings pool were to be allocated to gold bullion, the incremental demand in India would be about 180

tonnes. This indicates that, given the current level of savings in the country, combined with the rightmarketing approach, we could significantly increase the total gold offtake within India.

However, our interaction with local commercial banks involved in gold bullion imports shows that thesebanks are not too keen on exploring the gold retail market. Most of them are just happy to focus on thewholesale TT bar market, a sector in which the banks do not add any value to the business, and act only asselling agents. In addition, some of the firms that originally showed interest in the retail gold market,focused only on risk factors:

1. Costs of servicing the individual customers

2. Costs of managing gold inventories

3. Hedging currency and gold price risks

4. Managing quality and resale issues involved in the buy-back process

5. Competition from neighbourhood jewellers

Retail Investment History in India

020

406080

100120

1996 1997 1998 1999 2000 2001

Bar Ho arding Medals Imit atio n Co ins

Source: GFMS


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My 18 years of experience in the retail gold investment business internationally, has taught me one thing:successful (and profitable) players in the gold market have alwaysprovided consumers with afullrange of

bullion products. A wide range of products needs to be made available to every participant in the goldmarket, from manufacturer to wholesaler and from retailer to the end-consumer. Cross-subsidies and crossselling of products will go a long way towards making bullion operations profitable. All of the issues that

banks have raised regarding logistics, pricing, delivery, or buy-backs can easily be resolved within thecurrent structure in India. What is needed is the commitment of dedicated personnel and resources. Unless

banks plan to develop full-fledged bullion banking operations, they should perhaps consider opting out ofthis business entirely.

Based on our understanding of the market, our research findings, and the active dialogue with the localtrade, we have come to the conclusion that an effective way to harness the Indian markets potential forgrowth is as follows:

1. Develop new, credible distribution channels that would make access to investment gold easy forIndian consumers. These are prospects who may not ordinarily be reached by the traditional

jewellery shops, and who may be more comfortable in making their investment purchasesthrough financial institutions.

2. Promote gold as an alternate asset class to more sophisticated investors, with the introduction of

securitized paper gold products, backed by physical gold.

In order to do this, we will need to motivate banks with large distribution networks, sizeable customerbases, and strong marketing skills, to play an active role in the process. Drawing on our experience in theworlds more developed gold markets, we recognize that the availability of retail gold products throughsolid financial institutions strengthens golds image as a savings instrument, and this perception willcontribute to the process of integrating the bullion market with the financial markets.

Keeping our core objectives in mind, we initiated dialogue with ICICI Bank in February of last year, justprior to our conference in Delhi. ICICI Bank has a sizeable network of about 450 branches, and over 1100ATMs across the country. In a very short period, ICICI Bank has developed into the first gold bullion

bank in India. This achievement is primarily based on the strength of its aggressive marketing and the

country-wide presence of its retail network as well as on its active role in the local banking industry. Itsfirst retail gold product, the ICICI pure gold coin, was launched in late December of last year.

As of today, ICICI Bank is considered to have entered the gold business in a significant way. Besidessupplying TT bars, the Bank also lends gold to exporters and retails coins in about 50 of its branches.Future ICICI plans include providing retail products such as Gold Accumulation Plans, Gold SavingsAccounts, gold lending to domestic manufacturers, and increasing their participating gold retail outlets to200 branches by the end of this year.

We have come a long way in India; I am sure you will agree with me that one of the most importantingredients of this success has been the coordination of the amount and type of education and marketingefforts with the local market conditions and Indian consumers preferences.

There is little doubt in the minds of the gold market participants in India that the stage has been set forfully exploiting thegrowth potential of the investment gold market. The financial institutions, the largedistribution houses, the World Gold Council, the coin and bar refiners and manufacturers, are all playingtheir individual roles in a concerted manner, in order to make this a win/win situation for everyoneinvolved. We, at the Council, are happy to continue to play an active role in nurturing the bullioninvestment culture further, as, we firmly believe that it will be the key new driver for incremental golddemand in India.

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