What Indian consumers think about gold: survey
A new survey by Morgan Stanley finds that, although Indians are set to buy less gold in 2012, with volume demand to drop 13% for urban India, respondents said they expect gold prices to rise by 8% this year.
The Indian government's attempts to curb gold demand, since gold already represents 72% of India's current account deficit, appears to be working. India's demand for the precious metal is estimated to fall by 4% in volume and rise 4% in value in 2012, according to a report by global bank, Morgan Stanley.
The research report expects volume demand to drop 13% for urban India and rise 4% for rural India.
Morgan Stanley conducted a survey of 2,019 urban and rural gold buyers across 16 Indian cities for urban consumers and 8 Indian states for rural consumers.
The survey report notes that Indians own 20,000 tonnes of gold worth $1 trillion. Household gold consumption appears to have gone up to $45 billion in 2011 from $19 billion in 2009. To put things in perspective, India's gross domestic product (GDP) is inching closer to $2 trillion. This means, the value of gold held by Indians is comprises nearly half of the country's GDP.
Gold accounts for one-third of the household portfolios Morgan Stanley surveyed. Respondents from several households said they expect gold prices to rise by 8% in 2012. However, an additional 8% to 10% rise would lead to a proportionate decline in volumes.
The survey notes that gold is not the first asset that Indian households liquidate during bad times; it is equities. Gold remains an important asset class for investment, having outperformed most other asset classes over the past five years.
Indian households also are increasing their demand for gold bars and coins. The survey notes rising income is behind the growing share of gold bar holdings.
The survey notes that India's demand for gold is driven by both consumption and asset class considerations.
The report indicates that the demand for gold will be split equally among investments and `life events' (which includes marriage or other ceremony, religious occasions, gifting, fashion statements and the like) and discretionary consumption.
Though `life events' are more important for rural consumers, urban consumers will tend to strike a balance between the need to invest in gold and `life events'.
The report adds that in 2012, gold demand for life events is expected to increase by 50% pushed by an increase demand from rural India.
With regards to the drivers of gold purchases, the report adds that so-called ‘life events' were responsible for around 45% of gold purchases by urban households in 2010, while discretionary consumption was around 25% and investment as a driver accounted for another 30%.
In 2011, life events as a driver for purchase came down to 35%, and investment rocketed to around 40%. Discretionary consumption was the other 25%.
The report notes that Indian households are increasingly channelling their investment demand through bars or coins. The report projects a 2% to 3% point increase in share of bars and coins this year. The World Gold Council has said bars and coins represented 39% of total investment in 2011, a record high.
When speaking about the reasons why they bought gold jewellery in the past 12 months, respondents said auspicious events like marriages and festival accounted for 35%, while investment demand accounted for 20%. Buying gold as a backup for bad times accounted for 16% of those surveyed, while gifting on events was another 15%.
Around 8% of those surveyed said they bought gold as an impulse buy or bought gold for no specific reason. Another 6% of those surveyed said they bought gold because they were fond of the precious metal.
Around 13% of Indian households have taken loans against gold in the last year, with a slightly greater prevalence in rural India. Some 60% of rural households choose the unorganized sector for taking gold loans, while banks are preferred by urban households.
These loans are usually taken for funding farming activities in the case of rural households, while for urban households the reasons are quite dispersed. The rate of interest is in the 15% to 20% range.
Asked what would happen if prices were to rise above expectations, 46% of those surveyed said they would keep the same amount for purchase though reduce the quantity of gold, another 25% said it wouldn't matter and they would increase the amount spent, some 19% said they would cut down on their total spends on gold and invest more in other assets, while just 6% said they would buy studded gold jewellery instead (which has lesser usage of gold).
The report adds that if prices continue to rise, demand may not come off given investor psychology.Author: Shivom Seth