India's Appetite for Gold Taking New Forms

Daniel's wife owns at least a kilogram of jewellery and he sports a gold watch. But he is also shrewd enough to realise that the world's biggest gold consumers are falling out of love with wearing their wealth, preferring to stock up on coins, bars and bullion-based investment funds as they look for returns safe from the ravages of inflation and the dictates of fashion.

The current generation is not serious about gold. They have bangles but they don't wear them, Daniel, of Shreyas Investment Services, told Reuters in his basement office, after wrapping up an offer to clients of the SBI Gold Fund as an investment.

Look at college campuses, Indian girls there are not interested in gold jewellery. My wife has about one kilo of gold jewellery but my daughters are not interested.

Demand for gold bars, coins and other pure investments in India, Asia's third largest economy, soared 83 percent in 2010 from the year earlier to 349 tonnes, according to GFMS, a precious metals consultancy that is part of Thomson Reuters.

The amount of gold used in making jewellery in 2010 rose 36 percent to 685 tonnes -- giving investment demand 34 percent of total buying, up from 28 percent in 2009.

Gold has come a long way from being a jewellery item to an alternative currency, said Gnanasekar Thiagarajan, a director with Commtrendz Research.

Investment demand could surpass jewellery demand in the next two to three years, he said.

SOLID INVESTMENT

Indians' passion for gold dates back centuries and the country is home to one of the world's oldest -- albeit now largely defunct -- mines.

Gold, the ultimate status symbol, is also the gift of choice at celebrations, and jewellery stores across the country heave with customers in the run-up to festivals and the traditional wedding season in a country where brides are often weighed down with the wealth their parents give them.

Overall, gold buying in India jumped 38 percent in the second quarter compared with a year ago, as soaring prices simply fuelled perceptions it was a smart investment as worries about the global economy deepen.

Global gold prices have risen 29 percent in 2011 and hit a record $1,920.30 per ounce on Tuesday. India's domestic gold prices MAUc1 have climbed 33 percent and touched a high of 28,744 rupees per 10 grams on Tuesday.

With India's inflation nudging 10 percent and the central bank's key lending rate at 8 percent, domestic deposits and fixed-income investments are looking especially vulnerable, and the Bombay stock market has fallen 16.5 percent this year.

If you look at interest rates, in real terms they are still negative so investors will definitely look at gold, said Gargi Shah, metals analyst with GFMS.

Investment demand has literally exploded.

BISCUITS VS BANGLES

World Gold Council data for the second quarter of 2011 shows Indian investment demand rose 78 percent on a year ago to 108.5 million tonnes while jewellery demand rose 17 percent to 139.8 million tonnes.

In China, the biggest gold consumer after India, jewellery demand rose a comparable 16 percent in the quarter and investment demand grew by 44 percent.

Unlike jewellery, investment gold retains its value better because fabrication costs are significantly less and buyers don't have to worry about their pieces becoming dated, making them harder to sell.

R.C. Joneja, the white-haired manager of a jewellery shop in New Delhi's central Janpath district, says it costs about 1,000 rupees ($21) to make a 10 gram biscuit -- a bar about the size of a credit card -- while manufacturing a jewellery piece of similar weight would cost three times as much.

Customers prefer to buy these if it's only for investment, he said, displaying a coin and a biscuit.

But if someone wants to buy jewellery, they will definitely still buy jewellery.

PAPER GOLD

While owning physical gold may now have become harder at such high prices, Indians are snapping up paper gold, funds like those that financial adviser Daniel sells for a minimum monthly payment of 100 rupees (about $2).

Such small requirements are another attraction for paper gold investments in a country where 42 percent of the population have barely enough to eat and 15,000 rupees a month makes you middle class -- while a simple signet ring costs 20,000 rupees.

Investing in gold has become affordable, says a flyer for the SBI Gold Fund, which closed its offering on Monday.

Reliance Capital's gold exchange traded fund (ETF), India's third-biggest gold fund, has more than trebled the number of its investors since March, and people are investing in it through online routes as well as in person.

Despite prices already higher than they have ever been, gold is still proving a worthwhile investment.

Funds that invest in gold were the top performers in August in India with gold exchange-traded funds (ETFs) garnering returns of 15.2 percent, data from tracker Lipper, a ThomsonReuters company, showed.

Absolutely, you will see this kind of trend continuing, GFMS consultant Shah said of the investment appeal of gold over jewellery.

We won't see the reverse unless there's a change in the gold price trend.

At Mumbai's Zaveri Bazaar, a warren of jewellery stores that is also the hub of India's bulk gold trade, businessman Sanjay Darji is betting on gold remaining a sound investment as he stocks up on coins.

I bought one, two and eight gram coins for investment purposes. The thing about coins is quality is assured, unlike jewellery, Darji said.

It's better than keeping idle money at home.