http://www.bloomberg.com/apps/news?pid=20601039&sid=ag773oRnlA2c&refer=columnist_mukherjeeOct. 2 (Bloomberg) -- If the women and temples of India were to sell every ounce of the 15,000 tons of gold they collectively possess, they could buy Citigroup Inc. at a 17 percent premium to the bank's market value.
Of course, it won't happen, and not just because selling 10 percent of the world's above-ground stock of yellow metal would depress the price so much that the sale proceeds wouldn't be enough to buy the world's biggest financial-services company.
The reason that the idle wealth of India isn't put to a productive use is a combination of economics, demographics, inheritance laws and a deeply rooted cultural affinity for gold.
With the onset last week of the annual Hindu festival season, a busy period for jewelry purchases, bullion prices have started climbing, increasing the cost of what is already a colossally wasteful national habit.
Financial innovation is needed, not to prompt Indian families to sell their grandmothers' bracelets -- they will only do that to make a new pair of earrings -- but to make better use of the money that's coming into precious metals either to speculate or to hedge against a drop in the value of paper money.
Indian Prime Minister Manmohan Singh wants $150 billion of overseas investment in roads, ports and power stations. With the government last week announcing 8.9 percent economic growth in the quarter ended June 30, bankers are forecasting industrial credit requirement at $175 billion over the next three years.
Immune to Prices
Most of this money -- $290 billion at the current gold price of more than $600 an ounce -- is already in India, lying in bank safe-deposit boxes, earning nothing. But far from channeling the gold into the financial system, households are spending more of their current incomes on adding to their hoard.
India is the world's largest consumer of gold by volume, with average annual demand of 676 tons during the past decade, three times more than in China. Gold futures rose 3 percent in New York over the past two weeks as Indian jewelers began stocking up.
Price alone doesn't deter Indian buyers.
As the World Gold Council's recent research shows, when the precious metal became steadily more expensive from 2002 to 2005, Indians bought more of it. Demand for the yellow metal in India ebbs only when the price fluctuates too wildly, as it did in the first half of this year.
``The value of gold sales is often quite price inelastic,'' says Natalie Dempster, a researcher at the council. ``What does seem to adversely impact on demand is a pickup in the pace of daily price fluctuations or volatility. Consumers are wary about purchasing when the price is volatile for fear that they buy and then find the price falls.''
Gold Funds
An exchange-traded gold fund, such as San Francisco-based Barclays Global Investors' 21-month-old Ishares Comex Gold Trust, may be a good way to monetize investment demand for the metal.
In January 2006, after several years of hand-wringing, the Indian regulator allowed exchange-traded funds, or ETFs, with gold as the underlying security, to be set up in the country.
UTI Mutual Fund, the nation's second-biggest money manager, and Benchmark Mutual Fund, which specializes in index-tracking investment pools, are awaiting regulatory clearance to launch exchange-traded gold funds, which would buy physical gold from market makers -- called authorized participants -- in return for shares that can be bought and sold on a stock exchange.
U.S.-traded gold ETFs have returned 28 percent over the past year. In India, they would offer Hindu temples a good way to earn a high return on their devotees' affection.
Gold ETFs will have a much better chance of success than a government plan seven years ago to get families to melt their jewelry and deposit the gold in a bank account for a paltry 3.5 percent per annum. No wonder the plan bombed.
Property Rights
As part of her bridal trousseau, or as a gift from her husband, gold is a Hindu woman's property.
If a husband or a son borrows the jewelry and fails to return it with interest, he's guilty of criminal breach of trust.
By contrast, the Hindu Succession Act of 1956 gave a man the right to will away his wealth. This clause was flagrantly abused to disinherit married daughters from paternal property.
This inequity in inheritance laws enhanced the ancient religious appeal of the metal. But after an amendment last year, daughters have won the same legal rights as sons to reside in and claim a share of their parental homes.
Their birthright in a family's joint property can no longer be willed away by the father.
It might take a decade or two, but this legal change and an inevitable lifting of restrictions on taking money out of India will surely take some shine off gold.
In the interim, jewelry demand may keep increasing as the economy and disposable incomes grow rapidly.
Gold may also benefit from India's youth bulge. With two- fifths of the current population -- or more than 450 million people -- aged 19 years or younger, there won't be a dearth of marriages over the next couple of decades.
Besides, don't expect any bride to ever be willing to take shares in an ETF.
(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Andy Mukherjee in Singapore at
AuthorTopic: How India Can Open $290 Billion Treasure Chest (Read 480 times)
April 21, 2006, 12:21:02 AM