THE  MOST SIGNIFICANT EVENT OF THE GLOBAL  GOLD  MARKET IN RECENT TIMES

India has jumped to No.1 in  jewellery consumption, brushing aside USA, Italy and China in the process. India imported, 407 tonnes during 1995, valued at over Rs. 20,000 crores at a cost US $ 3.4 billion. Total Indian Gold Consumption including jewellery for exports is estimated to be 500 tonnes in 1996, the highest in the world.
 
World & Indian Gold Markets  -  THE  DATA  MATRIX

Total Gold Consumption of top Ten gold consuming countries in the World for the year 1995.

 
 

India  USA  Japan  China  Saudi Arabia  Taiwan  Turkey  South Korea  Indonesia  Thailand

up 5%  up 6%  dn 29%  dn 6%  dn 4%  dn 27%  up 14%  up 8%  up 39%  dn 11%

                                                                       Source WGC

ESTIMATED   JEWELLERY   CONSUMPTION  (INCLUDING SCRAP)  IN  MAJOR  COUNTRIES
SOURCE: GFMS, QUANTITY IN TONNES
 

COUNTRY  INDIA  UNITED STATES  CHINA  SAUDI ARABIA  ITALY  TAIWAN  INDONESIA  JAPAN  TURKEY  GERMANY  THAILAND  HONG KONG  MALAYSIA  SWITZERLAND  ISRAEL

1989  213  256  125.4  85.1  131.1  105.8  73.8  131.5  97.2  53.3  66.4  54  10  8.8  4.1

1990  228.1  237.2  93.8  85.3  149.6  94.6  82.9  129.7  121.6  65.7  70.9  36.7  13.1  10.8  4.1

1991  214  236.1  223.5  127.5  160.5  110.6  60.1  125.7  93.8  72.9  61.3  54  13.7  11.3  3.8

1992  278.5  259.7  330.8  170.4  168.2  150.3  76.9  122.4  108.6  65.3  62.6  58.5  11.3  6.5  5

1993  241.4  284.9  286.1  166.4  135.8  123.5  72.3  106.9  124.2  65.6  62.7  49.3  10.1  4.3  4.3

1994  326.1  300.9  296.5  136.1  124.7  111.3  109  108.4  78.3  64.3  61.6  9.8  8.1  3.9    -

 

WORLD  GOLD  SUPPLY  AND  DEMAND
SOURCE: GFMS, QUANTITY IN TONNES
 

SUPPLY  MINE PRODUCTS  NET OFFICIAL SALES  OLD GOLD SCRAP  GOLD  LOANS  FORWARD SALES  OPTION HEDGING  DISINVESTMENT  TOTAL SUPPLY

1990  2135  191  533    5  222    7  3093

1991  2160  117  470    96    15  290  3148

1992  2233  607  473      156      103  3572

1993  2290  493  558      217      3558

1994  2280  86  594      163  57  182  3362

1995  2272  201  602      461  87    3623

 
 

DEMAND  FABRICATION     Jewellery     Electronics     Others  TOTALFABRICATION  BAR HOLDING  GOLD LOANS  OPTION HEDGING  INVESTMENT  TOTALDEMAND

1990    2181  216  279  2676  224    193  3093

1991    2340  206  305  2851  252  45    3148

1992    2739  176  271  3186  282  85  19  3572

1993    2541  182  306  3029  162  65  31  271  3558

1994    2604  194  274  3072  238  52    3362

1995    2749  209  299  3257  299  23  44  3623

 
GOLD   PRODUCTION  COSTS  IN MAJOR PRODUCING COUNTRIES
SOURCE: GFMS,      US  DOLLARS  PER TROY OUNCE
 

		1994	1995
AUSTRALIA	CASH  COSTS TOTAL  COSTS	245 298	258 323
BRAZIL	CASH  COSTS TOTAL  COSTS	236 286	229 271
CANADA	CASH  COSTS TOTAL  COSTS	227 279	247 295
PAPUA NEW GUINEA	CASH  COSTS TOTAL COSTS	158 247	169 246
SOUTH AFRICA	CASH  COSTS TOTAL  COSTS	282 318	323 364
UNITED STATES	CASH  COSTS TOTAL  COSTS	212 277	224 291
OTHERS	CASH  COSTS TOTAL  COSTS	199 265	189 254
AVERAGE	CASH  COSTS TOTAL  COSTS	241 293	257 315

 

THE  WORLD’S  TOP  TWENTY  GOLD PRODUCING COUNTRIES
SOURCE: GFMS,   QUANTITY IN TONNES
 

RANK	COUNTRY	QUANTITY 1994	QUANTITY 1995
1994        1995
1                1	SOUTH  AFRICA	583.9	522.4
2                2	UNITED  STATES	326	329.3
3                3	AUSTRALIA	254.9	253.5
5                4	CANADA	146.4	150.3
4                5	RUSSIA	158.1	142.1
6                6	CHINA	124.1	136.4
10              7	INDONESIA	55.3	74.1
7                8	BRAZIL	73.4	67.4
8                9	UZBEKISTAN	64.4	63.6
9                10	PAPUA  NEW  GUINEA	60.5	54.8
11              11	GHANA	44.5	52.2
13              12	PERU	39.3	51.5
12              13	CHILE	43.3	48.5
14              14	PHILIPPINES	31	28.4
16              15	ZIMBABWE	22.5	26.1
15              16	COLOMBIA	25.5	24.1
19              17	MEXICO	13.9	20.3
20              18	VENEZUELA	13.7	17.1
17              19	BOLIVIA	14.7	16
18              20	NORTH  KOREA	14	14

 
 

WORLD

Gold Field Mineral Services(GFMS) indicates that the hedging of future mine production reached a record level during 1995. However this increased supply from mining companies forward sales and options was more than offset by the growth in physical demand, which like its principal component, jewellery fabrications, also rose to new record levels during 1995.

On the supply side of the market, world mine production showed a modest decline for the second consecutive year, falling .04%, in 1995 to 2272 tonnes. The main reason for the overall decline was the 10% decline in South African production. Elsewhere, mine production was generally above 1994 levels, with good growth continuing in a number of countries in Latin America, Asia and Africa.

Although there was little overall change in the level of mine production, the most dramatic development in the supply side in 1995 was the 183% increase in the forward selling  of future output. Higher levels were recorded in North America and Australia, where companies have traditionally been strong users of hedging instruments. But in 1995 there was also a significant increase in forward sales from South African companies. The overall increase in forward selling positions resulted in a net 461 tonnes of accelerated gold supply being added to the market, compared to 163 tonnes in 1994.

Another area of increased activity was the official sector where net sales rose to 201 tonnes in !995, more than double the 1994 level. A large part of the total, however consisted of sale of 175 tonnes announced by the Belgian Central Bank in March 1995.

The recycling of  old gold  scrap rose by a marginal 1% in 1995 to 602 tonnes with a decline in the Middle East  almost offsetting  increases in  Asia and Latin America

The above ground stocks of gold was estimated to be 129400 tonnes at the end of 1995. Just over half of this consisted of fabricated gold (part of which is recycled as scrap every year), with the next largest part being official sector reserves some what in excess of  35000 tonnes.

The pattern of price movements in 1995 was remarkably similar to that of  the previous year  and the annual  highs and lows were both within US $ 3 per troy  ounce of the 1994 equivalents. The trading range and daily volatility fell to new lows with the gold price volatility falling to lowest level since 1968. However, volatility more than doubled in 1996 over the 1995 level and it was the highest in more than 4 years.

Average western world cash and total costs of  producing newly mined gold both increased in 1995, rising to US $ 257 and US $ 315 per troy ounce, respectively.

The 261 tonne increase (+ 7.8%) in total supply in 1995 was absorbed by a higher off-take in all demand categories but particularly from jewellery fabrication and bar hoarding. Jewellery fabrication rose 6% to 2749 tonnes, just surpassing  the previous record set in 1992. The world fabrication demand rose by  6% to record 3257 tonnes in 1995. Strong demand was seen in all sectors with main contributions to the increase coming from jewellery (+5.6%), official coins (+27%) and electronics (+8%).
 
In 1995, a net investment of 44 tonnes indicated a general lack of  commitment on  the part of the western investors. Bar hoarding rose to its highest level  since 1989, as a result of increased demand in Japan and India.

The use of gold in the electronics industry advanced by more than  8%  to 209 tonnes in 1995. Minting of  official coins rose by nearly a third  to 92 tonnes. Bar hoarding  demand, mainly on account of Japan,  also showed a robust increase, off-take being  26% higher at 299 tonnes.

Dr. Stewart Murray, Chief Executive, GFMS, suggested that the rally in the gold price during Jan and Feb 1996 had certainly dispelled the notion of  US $ 400 per ounce as an impenetrable barrier. The rally proved to be unsustainable as the market had to contend with renewed sales of gold by the Belgian Central Bank, with a further at least some  203 tonnes announced in March 1996. Dr. Murray pointed out, “The current level of  mine production and scrap is still insufficient to meet the demands of fabrication  and bar hoarding. In 1995 the gap of  682 tonnes was filled by increased producer hedging  and to a lesser extent by  higher official sector sales. The question in 1996 was firstly whether a similar level  of hedging will be seen  again, and, secondly, whether  there will be any further official sector sales, perhaps in the run up to the European Monetary Union. If this does not prove to be the case, where will the market find the additional supplies required to fill the supply-demand gap?”  As it turned out official sector sales continued to be large in 1996 and after a brief spectacular sojourn with the 6 year high of  US $ 417 per troy ounce, gold is back again in the doldrums.

The world gold demand in the third quarter  of 1996 has been 655 tonnes, only 2% lower than the all time high of 688 tonnes over the corresponding quarter of 1995. 1996 saw strong  demand growth in Indonesia (up 39%), South Korea (up 8%), Malaysia (up 15%) and Vietnam (up 67%). The estimated demand in China, Japan and Taiwan fell by 6%, 29% and 27% respectively. Official gold imports into India in the third quarter of 1996 totalled 70 tonnes, the second highest level in any quarter. The highest was 75 tonnes recorded in the second quarter of 1996. WGC said that India’s gold imports in 1996 reached a new high. India’s total consumption of gold in 1995 was 477.2 tonnes, up from 415 tonnes in 1994. In the first nine months of 1996 , the Middle East and India, together consumed 655 tonnes of gold as compared to 644.3 tonnes in 1995 (a growth of 3.2%). Demand for gold in the third quarter of 1996 in the developing countries was 453.8 tonnes, just ahead of record created in 1995 of 453.3 tonnes. Demand in the UAE reached 10.8 tonnes up by 35%. The growing strength of oil prices in 1996 provided the gulf states with an unexpected boost. Imports into Dubai moved to 84.7 tonnes, 4% higher than 1995.

In the markets of the developed countries jewellery demand was 1% higher at the end of the third quarter of 1996, but after the high demands in 1995, the total gold demand was 7% lower.  The world gold demand during the first 3 quarters of  1996 continued to consolidate close to 1995 record high levels. The total demand in the markets monitored by the WGC was just 3% below the exceptionally high performance of the first nine months of  1995 for the same period in 1996.

GFMS has put the 1995 world gold demand at 3355 tonnes of which 1890 tonnes was newly mined. The rest came  by sale by the former Communist bloc, sales from central banks, recycled scrap gold and “forward sales” from mines borrowing gold from  central banks and selling it using their mine reserves as collateral.

South Africa, the largest producer of gold, produced only 522 tonnes in 1995, their lowest in the last 40 years. Losses through theft and smuggling in South Africa is very high. Gengold, the 3rd largest producer, earlier this year, recovered 70 Kg of stolen gold during a 4 month dragnet in it’s gold mines. Officials in Gengold say that as much as 10% of the production is lost due to theft. According to the South African Police, 20 tonnes of gold worth US $ 350 million disappear from the mines every year. Semi-refined gold vanishes into townships for refining - using mercury, also stolen from the mines -before syndicates move it, complete with forged documents, to lucrative European and Eastern Black Markets.
 
The IMF is facing difficulties in reaching an agreement to sell some of its Gold to aid the poorer nations. The management backed by the US and UK proposed selling off 5 out of 104 million troy ounces to finance poorer countries. But countries like Germany, Italy and Switzerland have opposed the move. It might take months or even years before a deal can be struck. Several countries like Japan and France have not  made up their mind as yet.

The IMF’s proposal of selling US $ 2 billion of it’s gold reserves, to finance a continuing ESAF programme is dependent  on  enough support within the IMF to push the issue through; which it currently has(85%). However, the Managing Director of IMF, Mr. Michel Camdessus, has stated that “A decision will be made with a desirable broad consensus”, reflecting the institution’s tendency to seek unanimity on all issues.

INDIA

Indian Gold imports under the SIL (Special Import License) aggregated  only 21 tonnes in 1995. Those under other official imports totaled  22.5 tonnes under  the replenishment scheme. Imports under the NRI scheme showed an increase by 70 tonnes over the previous year at around 229 tonnes, leaving the balance as unofficial imports (134 tonnes).

Gold prices in India touched an all time high Rs 5713 per 10 gms  of standard  gold in Mumbai in Feb. 1996 as the Indian Rupee had declined sharply against the dollar.

The WGC has reported that the Indian demand for gold in the third quarter of 1996 fell by 4% compared to strong demand last year. But this is the effect of the inauspicious  “leap month” the council said. There were signs that the demand for gold has gone up in the last quarter due to delayed gold buying.

There was more or less stable growth in demand in India. The cumulative demand for the first three quarters of 1996 at 365 tonnes was 1% above the total a year ago. By the end of  I996 it  exceeded the demand in 1995.

The WGC report said that the impact of industrial slowdown on the demand for gold is uncertain, particularly in the urban areas. The effect will depend on the durability of the slow down , however, this will be negated by yet another  excellent harvest  in 1997 and a climate of political uncertainty. Both these factors are known to have a favourable impact (increase) on the demand for gold.

The rise in demand in the last quarter of 1996 has been attributed to the peak demand associated with the Diwali season. The purchases for Diwali will get counted in the last quarter due to the late festival season  in 1996. WGC said that that has been helped by the reduction in interest rates and reserve requirements by the RBI. More gold is brought into India than any other country.

The WGC places India’s demand for bullion at more than 115 tonnes per quarter since end ‘94. In fact the demand touched an all time high of 135.7 tonnes in the second quarter of 1996. God demand, may have risen due to the fall from it’s peak prices reached in February 1996 when prices pierced Rs.5,720 per 10 gms.
Prices moved down later, but June’96 prices were still 8% above their year on year prices. The surge in demand during the second quarter of 1996 coincided with improved availability, with official gold imports setting a new quarter record at 77.5 tonnes, 19% higher than  the second quarter of 1995.

India is no great shakes even as a trader and barely exported 23 tonnes of the yellow metal in 1995. This is in stark contrast to big guns like UK, Switzerland, Dubai and Hong Kong who dominate the bullion trade.
 
But, India  is no longer a tightly controlled market. In fact, international experts say the country is in stage two in its evolution as a modern day market, stage one being a totally controlled environment closed to imports and with virtually no bullion trading.

Such a market (stage one) is dominated by local jewellers and prices are much higher than global levels leading to a flourishing underground bullion trade .

These features characterised India before 1993. Now India is at the second stage, where imports are allowed but are regulated; there is a local bullion market, and the prices are lower than in the first stage.

But, India has some way to go before emerging as a truly liberalised gold market, which is the third and final stage of evolution. At this level, commercial banks are allowed to trade in bullion and paper trading is allowed for speculation and well as for futures trading is permitted.
 
 

While the production of South African gold mining companies continued to fall in 1996 after a 10% fall in 1995 there are prospects of an increase in their production in 1997. Among the most significant efforts underway is being undertaken by the giant Anglo American Corporation to deepen the South Shaft at it’s Western Deep Levels Ltd. This is expected to yield an additional 475 tonnes of production in a 14 year period starting in 1997.

Meanwhile, the large North American gold mining groups appear to be on a treadmill. They have to keep running ever faster just to stand still. There problem, in a nutshell, is that the market values of their shares are determined mainly by looking at the mineable gold that they have in the ground; their reserves.

Investors put a premium on companies whose gold reserves keep growing and also give a higher rating to big gold mining groups. The scale of the challenge is neatly illustrated by the three biggest North American gold producers: Barrick Gold, Newmont, and  Placer Dome. If they want to keep shareholders happy, they would have had to bring in 7.03 million troy ounces of gold into their combined reserves in 1996, or, 217.7 tonnes.

That is more gold than that was produced in Canada or Russia in 1995, 150.3 tonnes and 142.1 tonnes respectively. The challenge has been put in the spotlight by the C$ 1 billion ( US $ 730 million) bid by Barrick for Arequipa, a four year old Vancouver company; the recent merger of  Battle Mountain Gold and Hamelo to form North America’s fifth largest gold producer; and Battle Mountain’s approach to Niugini Mining in August 1996 about the possibility of acquiring the 49.6% of the Papua New Guinea based company it does not already own.

The Arequipa bid did most to bring home to investors the problems ahead for groups such as Barrick, which was formed only a little over 10 years ago and is now the biggest gold miner outside South Africa. Arequipa’s most important asset is a project in Peru where, at the time the bid was made, only nine holes had been drilled.

What attracted Barrick was the fact that those drilled holes indicated there might be 3.5 million troy ounces of gold in that deposit. “ Arequipa has an incredibly exciting deposit,” says Leanne Baker, analyst at Salomon Brothers. “ The bid points up the challenge Barrick faces. Barrick needs to add 4 million troy ounces a year to reserves just to stand still. Barrick is paying to boost reserves and output down the road”.

Nick Hatch, at Flemmings Global Mining Group, suggests that: “ Obviously it becomes harder and harder to replace reserves. The problem can only get worse the bigger a company becomes. Companies like Barrick, Newmont and Placer Dome are sowing the seeds of their own destruction. They simply can’t go on growing as fast as they grew in the past and this is already being reflected in the Barrick share price.”

However, there are still very large virgin deposits being discovered in new locations that could counter this problem. Barrick  is moving to acquire control of  the largest new gold deposit in the world found in Busang, Indonesia. The value of this deposit is approximately US $ 20 billion. This will increase the deposits controlled by Barrick from 43 million troy ounces to almost double that amount. This will help Barrick to eventually try and become the world’s number one producer of gold. Barrick is being challenged by Placer Dome who have appealed to the Indonesian govt. to allow them to make an offer for the Busang mining rights. Bre-X had negotiated a deal to give 75% control of Busang to Barrick on behalf of the Indonesian govt. Placer has been negotiating with Bre-X for several months with a conditional offer well over the current Bre-X market price of US $ 13.15 per share. Sources point out that the price offered by Barrick was in the vicinity of US $18.52 per share. Placer is known to have bid at  a price of  US $ 19.63 per share.
 

As is apparent  from the above, one obvious way for a gold group to boost reserves is via takeovers or mergers. Barrick’s hectic growth has been helped by acquisitions, for example. It’s US $ 1.6 billion takeover of Lac Minerals, another Canadian company, in 1994 helped lift its annual gold output from 2 million troy ounces to just over 3 million troy ounces while adding reserves in Chile as well as North America.

The pressure for takeovers and mergers among gold miners is also being increased by the market’s preference for bigger groups. The top three companies (Barrick, Newmont and Placer) account for 66% of the total market capitalisation of this sector of the Financial Times Gold Mines Index; whereas their share of  gold production is only 54%. Clearly the market is prepared to pay a premium for size, There are, however, significant risks in the merger strategy. It may increase total reserves and production and thus the market rating, but the price paid is sometimes far more than the cost of  finding new gold from scratch; although finding multi-million ounce deposits is definitely not easy.

Companies with good exploration records are the ones with the potential for adding most value, rather than those that have to acquire. However, the difficulty that investors face is that it is usually small or “junior” gold companies that have exploration successes. Arequipa in Peru and two other Canadian companies, Bre-X in Indonesia and IAMGold in West Africa, are recent examples.

In India, the joint sector diamond and gold exploration and mining project, mooted by the State-owned Orissa Mining Corporation (OMC), in collaboration with nine private companies, is yet to obtain the approval of the State Government.

Encouraged by the early prospecting reports, OMC had taken the initiative in reaching an agreement with the nine companies- seven of them foreign, which stipulated that these firms would undertake advanced exploration for these precious minerals and metals in the State at their own cost.

If it was found that mining of diamond and gold would be economically viable, the OMC would invest in the project for commercial exploitation for the first time in the State.

It had also been agreed that the funds already invested by the companies would serve as their equity while the OMC would have to invest an equal amount in the 50-50 joint venture. But if the explorations indicate that the two projects would not be viable, the investment made by the companies would not be reimbursed.

Bharat Gold Mines Ltd. revival package got techno-economic clearance for it’s rehabilitation and the proposal is under active consideration of the Government of India. BGML has been referred to the Board for Industrial and Financial Reconstruction a year ago.

In Latin America, Austac Gold Nl and its Bolivian partner Austral SRL reached an agreement with La Source Compaigne Miniere SAS to enable exploration work to resume at three gold prospects. La Source will earn a 60% interest in Escalo and a 75% interest in Podersa and Golan by funding work on each property. La Source has committed to spend a minimum of $300,000 on the properties with at least $50,000 on any one property. They suggest that the properties have potential for Andean-type gold and copper mineralisation.
 
 

A. Total imports of gold in 1995 was 407 tonnes comprising of:
 

I. Imports under Special Import License  II. Other official imports III. Imports under NRI scheme IV. Imports through unofficial channel	21.5 tonnes (5.3%) 22.5 tonnes (5.5%) 229 tonnes (56.3%) 134 tonnes (32.9%)
B. Total gold consumption in India in 1995 was 477 tonnes consisting of:
· Imports · New domestic production · Recycled gold (Jewellery and Scrap)	407 tonnes (85.3%) 2 tonnes (0.4%) 68 tonnes (14.3%)
C. Gold use patterns in India for total consumption of 477 tonnes in 1995:
· Domestic Jewellery fabrication · Non-jewellery investment demand · Exports of gold (jewellery) · Other industrial uses	381.5 tonnes (80%) 71.5 tonnes (15%) 23 tonnes (4.8%) 1 tonnes (0.2%)
D. The total stock of gold in India at the end of 1995 was officially estimated at 9,016 tonnes and at the end of 1996 it is expected to be about 9,500 tonnes which is about 7% of the total world stock of about 1,29,400 tonnes.	Some unofficial estimates put India’s gold stocks to be as high as 30,000 tonnes
E. India’s share of total world trade in gold is still just under 1% with the main trading centres being the UK, Switzerland, Dubai and Hong Kong
F. The Gold Reserves of the Reserve Bank of India is around 397.5 tonnes out of a total holding of around 28,225.4 tonnes held by all the Central Banks of the world combined. The RBI’s holding is about 1.4% of the total Central Bank holdings.
G. Gold prices in India peaked in February 1996 at around Rs. 5,713 per 10 gms and fell to a year end low of  Rs. 5,030 per 10 gms in December 1996.
H. In 1994, the government earned Rs. 390 crores from import duties on gold. In 1995, the figure increased to Rs. 663 crores.
I. In the first quarter of 1996, India’s gold consumption was 118.8 tonnes. In the second quarter it was estimated at 135.7 tonnes and in the third quarter it was 114.1 tonnes. In the last quarter of 1996, gold consumption is expected to have been between 130 and 135 tonnes.
J. Currently, India has three active gold mines, Kolar and Hutto in Karnataka and Ramgiri in Andhra Pradesh with a combined output of 1.8 tonnes to 2 tonnes.

 

1. Bullion exports and imports under the FERA Act, 1947. Control over gold production was assumed by the Mysore Govt in Nov. 1956. The official gold stocks of the RBI were revalued in the same year. The proportional reserve system was replaced by the minimum reserve system, for the purpose of note issue.

2. In a major effort to mobilise the vast gold reserves in the country, an issue of 15 year Gold Bonds at 6.5% was made in Nov. 1962. The bond were issued in exchange of gold, gold coins and gold ornaments. The issue of Gold Bonds were accompanied by exhortations to the public to refrain from buying gold and to surrender their holdings to the govt. The RBI also advised commercial banks to recall loans made against the security of gold. Forward trading in gold  was banned in 1962.

3. The diversion of savings into the bullion market was sought to be controlled by the promulgation of Gold Control Rules in 1963. The rules prohibited the manufacture of gold ornaments of more than 14 carat purity. Individual gold holdings had to be declared. In 1963, refineries were prohibited from manufacturing gold of more than 14 carat purity. Control over internal trade and distribution of gold by the govt. was fully established in 1964.

4. A second attempt to garner gold was made in March, 1965 when a new series of  7% Gold Bonds 1980 were issued. Opportunity was given to holders of unaccounted money to convert them into these bonds. The quantity raised was 6.1 tonnes.

5. A third series of Gold Bonds designated as National Defence Gold Bonds, 1980 at 6.5% was issued in Oct. 1965.

6. Strict gold control remained in force till Nov. 1966, when the rules were amended, lifting the ban on manufacture of  ornaments of more than 14 carat purity. In 1968, the Gold (Control) Act 1968, was passed establishing the scheme of gold control on a permanent statutory footing. Except for some minor modifications incorporated in the Act in 1969, 1972 and 1973, the structure of the Act did not undergo any change.

7. The Voluntary Disclosure of  Income and Wealth (Amendment) Ordinance, 1975 granted immunity from confiscation, penalty and prosecution under the Gold Control Act, 1968, to all disclosures of wealth and income in the form of gold within the stipulated period.

8. There was a major shift in policy by the Central Government as reflected in the 1978-79 budget which strongly disapproved of smuggling operations, considered to be a consequence of the differential between the domestic and international gold prices. The govt., that year undertook gold auctions which are construed as an anti-inflationary  measure. The RBI was chosen as the governments’ agent in the sales operation. However, these auctions came in for sharp criticism as it was concluded that this was not a practical proposition to either check smuggling or control domestic prices. The govt., thus discontinued the official auctions in 1978.

9. Liberalisation has brought with it major changes in regulations governing the purchase and ownership of gold. Prior to 1991, gold was allowed to be held only in the form of  jewellery. Under the NRI baggage rules, an NRI is entitled to bring in 5 Kg. of gold every 6 months. by paying a nominal duty of Rs.220 per 10 gms. The Special Import License scheme also allows a category of exporters to repatriate their overseas earnings by importing goods which had previously been banned including gold bullion.
 
10. The Maharastra govt’s new tax of 2% on the value of gold processed was revoked. Further, a civic tax in Mumbai (an entry tax to the municipal limits) city, has been reduced from 2% to 0.5% as recently as 1st April 1996.

11. From 1996 Indians can  hold gold in the form of bars, coins etc. and gold can  be advertised  on domestic Television.
 

The Kabra Committee has submitted it’s recommendations (on futures trading on gold and silver, introduction of gold depository and gold bond schemes). The Gold Bond scheme introduced in 1993 and due to expire in 1998, had mobilised 41 tonnes of gold. At present the government is purchasing the bonds at a discount of 14%  as the bonds were trading in the secondary market at a discount of 20%.

The RBI will buy the bonds, each worth 500 gms and above, at a fixed price of Rs. 4443 per 10 gms.

On December  31, 1996 the government  announced that it will increase the NRI entitlement to bring in gold to 10 Kgs per head.
 

New Initiatives

A RBI expert committee has mooted fundamental changes in the Indian Gold Market, and the report was recently made public by RBI deputy governor, Y Venugopal Reddy.

Among other things, the committee has called for:

· standardisation of marketing practices;
· setting up of a Gold Management Board with statutory powers for overseeing bullion trade;
· introduction of gold-price-linked instruments and
· introduction of hallmarking of gold jewellery as a measure of consumer protection.

At a seminar organised in India by the World Gold Council in December 1996, the commerce secretary, Tejender Khanna stated that the government, was “considering” increasing entitlement of gold imports under the special import  license, allowing agencies other than SBI to import gold and lowering the import duty on gold.
 
 
 

TRENDS

H.B. Junz, Director, Gold Economic Service had this to say (to the 10th AGM of WGC in New York). Gold according to him, is held by a multiplicity of individuals for a multiplicity of reasons, something which no “mere” commodity could claim. Gold demand depends on neither a country’s level of income, nor on it’s status as a producer of the metal. Bullion differs from other commodities in that it’s demand is rooted in historic, cultural, religious and emotional motivations in addition to cold business sense. The dichotomy is evidenced by the two largest off-take markets, India and the USA. The first virtually produces no gold, the latter ranks number two among global gold producers. While India has a per capita income barely above subsistence level and relatively little financial asset choice, the USA has high levels of discretionary spending and a proliferation of savings instruments. Similarly, the other largest producers, South Africa and Australia, are near the bottom of the gold consumption league.

Though the dollar price of gold was stable in 1995, there was volatility in the currencies. In India and Turkey, the local currency prices rose sharply. In neither case, the price rise triggered a liquidation of gold stocks in private hands.

Experience shows such disposals occur only in response to distress situations such as liquidity squeezes. Profit taking appears to play a lesser role, especially if the price rise reflects local policy problems.

So, consumer reaction to price rises induced by local political and policy circumstances and those by external factors are different. The former often induce household purchases, while the latter is guided by price rise expectations. For example, the Rupee price rise in bullion during the second half of 1995 had very limited impact on demand, while the rises in international prices in early 1996 triggered a wait and see attitude, with consumers returning to the markets by end March. Each year more than what new mines produce is absorbed in jewellery. The deficit is supplied by scrap dealers, occasional Central Bank selling and by producers who borrow against future output and sell it forward. Such borrowing was up late in 1995, particularly due to troubles in South Africa. That triggered a temporary shortage, exciting speculators. Rising consumer demand in India, China Hong Kong and Taiwan reflects economic uncertainty, but tied to their own currencies or countries. Since the gold rally began, the US Dollar is up. In fact the strong dollar and the reduced hedging by the producers have brought down the US Dollar price of gold.

A major Central Bank sale would also limit the price potential, but the official activity may be confined to increased leasing. Central banks have been increasingly willing to lease their reserves as demand for such a facility has increased in line with producer hedging. Additionally, western governments may keep pursuing the goal of low inflation for rest of the decade, and in doing so, rob gold of it’s safe haven role. Moreover the growth of derivative markets has significantly lowered the requirement for gold’s traditional role as a hedge against uncertainty.

The value of gold unlike all financial assets like stocks, is extrinsic; it  wholly depends upon what others will pay for it. No earnings, no interest or dividends and no meaningful economic demand. As an investment, it holds little intrinsicattraction, but there may be more overpowering personal reasons to put your money in the metal.

Since the all-time high price of gold reached in January 1980 at US $ 850 per troy Ounce, the world gold markets have been undergoing a long term consolidation.
 
The trends observed over 3 consecutive years indicate that the average world costs of producing gold has been steadily rising and was around US $315 per troy ounce at the end of 1995. In US Dollar terms, the floor price of gold also moved up for three years ending in 1995. However, in 1996, primarily because of the strength of the US Dollar  in  currency markets in the latter half of the year, gold prices touched near 3 year lows at the end of the year.

Volatility in gold prices increased to around 12.5% in international markets during 1996 as compared to 6% in 1995. In February, international gold prices were at a 6 year high of US $415 to US $417 per troy ounce, but by December it had crashed to near  3  year lows of US $368 per troy ounce.

In India, the February 1996 peak of Rs. 5,713 to Rs. 5,720 was followed by the year end low of Rs. 5,030 per 10 gms at the end of December 1996. This indicated a volatility of 12% , which is close to the international volatility of  around  12.5%

FORECASTS

We present here a selection of forecasts made by experts around the world:

· Makhan Lal Damani, President of the Bombay Bullion Exchange, expects international gold prices in 1997 to be in the range of US $ 355 to US $ 385 per troy ounce.
 
· In the longer term the Economic Intelligence Unit predicts that the international price of gold will increase by an average of about 3% per annum (a rate which is close to the present trend in general inflation rate in the major developed economies of the world). This would translate to a gold price of US $ 440 per troy ounce in 2005 and US $580 per troy ounce in 2010.
 
· However, gold analyst John Cairns forecasted that average gold price which was US $384 in 1995 and US $ 393 in 1996, would rise to US $ 440 per troy ounce in 2001.

· Economists  Alan Mackie and James Regan suggest a 60 per cent probability scenario where gold prices will hover at US $  440 between the period 1996 to 2000. This is based on a forecast of total world demand during this period  of 17,417 tonnes and world supply  of 14,280 tonnes. They also forecast  a gold price of US $ 490 for the period 2001 to 2005 and US $ 580 for the period 2006 to 2010.

The Indian gold price of’course tracks the international gold prices very closely now, with the Indian prices(excluding local taxes which vary from State to State) being about 10% higher than international prices. However, apart from the international US Dollar price of gold, the price of gold in India also depends on the Re/$ exchange rate. Given the differential between international inflation rates and Indian inflation rates, the rupee is expected to depreciate against the dollar by about 6% to 8% on an average every year.

Although, currently, Indian gold demand can fairly easily  be satisfied by supplies from the international market , nonetheless, Indian demand has been going up by between 10% and 15% in most of the last few years after liberalisation of the economy has taken place. Some forecasts put the demand for gold in the year 2000 at 1000 tonnes from the end 1996 level of  about 500 tonnes. If this were to happen, then, Indian demand for physical gold  would start to exercise direct upward pressure on the International price of gold.

· Jamal Mecklai, one of India’s foremost experts on gold, predicts that demand for gold in India will go up by 13% to 16% each year in the immediate future.
 
 

WORLD

While there are large divergences in gold demand from year to year in individual countries, total world  demand continues to be in a stable pattern. 1996 has probably ended with the total world demand at about the same level as 1995 or only marginally less. The prospects for 1997 is for steady growth in world demand led by India (because of continued growth in population and the economy) and the Middle East because of high oil prices in the last quarter of 1996 and early 1997.

Sales of gold are distorted by the forward selling by mining companies and sales from the stocks held by  Central Banks. Thus sales are not directly linked to new production of gold every year. While increases and decreases in the new production tends to be jerky because of leads and lags in the opening of new mines and closure of old ones, large new reserves of gold are still being found with the latest being in Indonesia. New reserves are still  able to significantly compensate for the depletion of reserves taking place in the existing mines, where gold is being extracted. However, to cater to the general increase in demand over a period of time, older mines will have to be worked deeper and new technology used to recover gold at an economic price.

Overall, for the immediate future, the world demand and supply of gold will remain in general balance. Gold’s fundamentals should lead to modest price rises in the next two years from the low levels witnessed at the beginning of 1997, but the market will be held back by a lack of investor interest. It is a characteristic of the gold market that sharp rises in the price of gold do not take place because of increased demand for jewellery in Asian countries but only by massive investor interest in the western countries and also Japan when the Yen is very strong in the international currency markets. Over the longer term ,of’course, the price of gold will be supported at the lower levels of the price range by the rising average cost of producing gold. However, the higher levels of the price range will be limited for quite some time by the latent potential of sales by Central Banks and the IMF from their existing stocks as well as from periodic forward sales by gold producing companies. Thus upto the beginning of the year 2000, gold would struggle to maintain a price above US $400 per troy ounce unless major shocks to the world financial markets take place, such as turmoil in the currency markets triggered by the approaching European Monetary Union or a major war. In any case, these events at the moment appear to be only possibilities and not strong probabilities. Also, how quickly the situation is brought under control if such shocks took place, would also determine how long the price of gold could be sustained at high levels.

Currently the strength of the US Dollar against other currencies is also preventing the dollar price of gold from going up and it is sliding further in early 1997.

Accordingly, UCS considers the following factors to currently have the most significant impact on the US Dollar price of gold in the international markets.

In the short run

1. International investor demand for gold, especially in western countries.
 
2. Size and structure of forward sales by gold mining and producing companies.
 
3. The market stance of major holders of gold stock such as the IMF and the Central Banks.
 
4. The exchange rate of the Dollar versus other currencies, especially the Japanese Yen and increasingly to some extent the Australian Dollar.

In the long run

1. Average cost of producing gold.
 
2. Economic growth rate of Asian countries.
 
3. Discoveries of large new gold deposits around the world.
 
4. Changes/improvements in gold mining and refining technology.

Our view is that if the US Dollar remains strong during the first quarter of 1997 as it is in January 1997  the price of gold will weaken further from its current level of  around US $ 355 per troy ounce . However, by the end of the second quarter of 1997, the price level should consolidate and then pick up later in the year, especially if the Japanese Yen and the Australian Dollar start to strengthen simultaneously The average gold price would be lower in 1997 as compared to 1996, but volatility will depend on the volatility in the currency markets. If the currency markets become very volatile, then volatility in gold prices in 1997 could exceed that in 1996, otherwise it should be lower.

For those wanting to buy gold, the best policy in the first quarter of 1997 should be to wait and watch. If prices fall further then they should look for opportunities to buy later in the year when the US Dollar stabilises in the currency markets. If, however, the US Dollar starts retreating in the currency markets during the first quarter, it may not be prudent to wait for a further significant slide in the price of gold and purchases should be completed.

INDIA

In India the following further factors have a significant bearing on the price of gold:

1. Rupee/Dollar exchange rate.
 
2. Customs duty on imports of gold.
 
3. The number of marriages in a year.
 
4. Seasonal demand patterns linked to festivals and the timing and size of agricultural harvests.

Of late, factors 3 and 4 have become less important because of the liberalised import regime for gold so that any significant increases in demand can be fairly quickly supplied through imports; although, from time to time, there may be some very temporary changes in prices because of these two factors. The most important are factors 1 and 2, the Rupee/$ exchange rate and level of customs duty. Here one can say that the chances of customs duty going up is fairly low, on the other hand, the chances of it falling further, especially in the near term, also appears to be low because of the success the current NRI gold import scheme is enjoying. In any case, in the immediate future, changes if any in customs duty would be marginal. The Re/$ exchange rate has also very little potential for the Rupee appreciating as the RBI intervenes in the market and prevents the Rupee from going up. However, the Rupee has a definite and sustained potential to depreciate over a period of time and official government policy is also to allow the Rupee to depreciate incrementally over a period of time. For these reasons, in general, the price of gold in the Indian market will always have more scope to go up than down after the first quarter of  calendar year 1997.
 
What happened in 1996 is a one time phenomena which can not be repeated in subsequent years. The gold price in India peaked in February 1996 at the same time as international US Dollar prices of gold were also peaking, however, at the end of 1996 both the international prices and Indian prices fell to the year end lows and by a similar percentage (between 12% to 13% for both markets). This happened although the Rupee, after the turmoil in the market in February 1996 fell from a level of about Rs. 34.50 in the first quarter of 1996 to Rs. 35.90 at the end of 1996, a depreciation of over 4%. Because of this depreciation the Rupee price of gold should have fallen by a lesser percentage than the international US Dollar price. This did not happen because the liberalised official import regime was working during this period to reduce the price premium in the Indian market for gold as compared to the dollar price in international markets form over 15% to 10% by the end of 1996. As a result, Indian gold prices ( excluding local taxes) fell  by about the same percentage as the international price.

In 1997 and beyond, the scope of the price premium narrowing in the Indian market will be much more limited especially as the customs duty itself is about  4.5% at current Indian gold prices. Therefore, the Rupee price of gold in the future, over a period of time, will fall less than the fall in international markets when the prices of gold are falling and the Rupee price of gold will increase faster than the increase in international prices when the prices of gold are rising. However, there will be inevitable leads and lags in this process with short periods when the gold price falls as fast as international prices. When this happens there is likely to be  short term arbitrage opportunity  to buy gold cheaply in India and wait for the inevitable rise in prices as the market adjusts.

For Indian traders, in general, the fall in the price of 10 gm Standard Gold in the Bombay Bullion market below Rs. 5,000 in the first week of January 1997 to about Rs 4,850 has already  made gold a very good buy. If prices fall further to, say, Rs 4,750 it will be an exceptional buying opportunity not likely  to be seen again in the foreseeable future as a fall in price to and below Rs 4,500 is most unlikely. In any case, any price close to Rs. 5,000 will remain a good buy for all  investors who can hold for some time. The signal to sell gold in the immediate future for short term  traders would be whenever the international price of gold approaches US  $ 400 per troy ounce. Otherwise, the investment should remain in a holding pattern, unless the Rupee falls very strongly in the currency markets (by say over 5%) in  a very short time (say in less than a month) Given the accelerating inflation rate in India since the end of 1996 the Rupee has become much more prone to devaluation in the short term. Therefore, for longer term investors gold should be sold only if  both the international price of gold goes close to US $  400 and simultaneously the Rupee depreciates sharply against the US Dollar .
 
 
 

Given the current  pace of reforms and changes in government policy  the Indian Gold Market can be expected to be fully  deregulated  by the year 2000. By that time capital account convertibility should also have taken place in the currency markets.

With the reforms in the financial sector and developments of the financial markets in terms of the width, depth and liquidity in India, it is possible that demand for physical gold as a form of insurance cum investment would reduce. But, development of gold as a financial product such as paper gold contracts, futures, options etc., deserves some comments.

1. The availability of financial instruments in the non government financial sector, could help in mobilising idle gold from the households.

2. The ban on forward trading may have to be lifted so that hoarding demand could come down and help in bringing the idle gold into the market or official pool.

3. If the import of gold is to be further liberalised, it would be necessary to evolve a framework for regulating the import of, trading and market making in gold and gold related products.

4. The issue of development of financial markets in gold is closely linked to the issue of capital account convertibility.
 
 Unlike the authorities of other countries, neither the government of India nor RBI have been an active participant in the gold market. Here there are 3 global patterns:
 
· Producer nations like South Africa, Australia and Brazil have shown interest in the development of spot and forward markets with the intention of providing financial products to the producers. These authorities have also promoted a leasing market in order to create a liquid forward market in gold, to enable producers to sell their product forward.

· Financial centres like Switzerland, UK, US, Hong Kong etc. have actively promoted gold related products. While the UK and the US  also allows  residents to trade, Singapore focuses on offshore entities in Singapore and non residents. In Hong Kong the market is fully liberalised with everybody permitted to buy or sell  physical gold or gold based financial products at will.

· The gold market has recently been liberalised in Turkey.  Turkey has a lot in common with India, domestic production is negligible, private sector holding is 5000 tonnes as compared to 9500 tonnes in India.

To bring idle gold hoardings into the market and to offer investor friendly  opportunities to people to buy and invest  in gold, Gold Accumulation Plans, whether by banks, bullion traders or jewellers, have been very popular in many countries. Some schemes are already operational in India which have been started by jewellers in western and southern India. Given the current low prices for gold UCS firmly believes that it is the ideal time for bullion traders and jewellers in other parts of India such as the Eastern Region to launch  Gold Accumulation  Plans ( GAPS ).
 

SCHEMES FROM CHINTAMANI
OPTION A

Deposit monthly advances of Rs. 1000 against cost of 2 gms of Gold  for 18 mnts, get back 36 gms of Gold plus 2 gms as bonus .

OPTION B

Deposit a one time advance equivalent of 36 gms of Gold at a price prevailing at the commencement of the scheme. After 24 months get back 36 gms of Gold plus 6gms as bonus.

OPTION C

Deposit 36 gms of Gold. After 30 months, get original amount deposited plus 8 gms of Gold as bonus.

SPECIAL FEATURES

25% off  on making charges if redemption is in the form of jewellery. Lucky draw for subscribers with a Maruti 800 going to the winner.

SCHEMES  FROM VNM  &  SONS

OPTION A

Deposit Gold for 6 months, gain interest at 10%  p.a. ; Deposit Gold for 1 year, gain interest  at 12% p.a.

OPTION B

Swarnavardhan : Deposit weight 100 gms, maturity weight  after 24 months 115 gms.; maturity weight  after 36 months 124 gms.

OPTION C

Swarna Kshema: Deposit monthly advance worth 2 gms of 22 carat Gold, on maturity receive Gold Bond for 25 gms after 1 year; Deposit monthly advance for 2 years, receive Gold bonds for 51 gms on maturity; Deposit monthly advance for 36 gms, receive Gold bond for 78 gms at the end of the maturity period.

SPECIAL FEATURES

New India Insurance cover :  Each depositor given the right to make direct claims in case of calamity.

SCHEMES FROM GITANJALI GEMS

OPTIONS

Investor to deposit any amount (min Rs. 1000) monthly for at least 10 months. Gold credited to subscriber’s account in the nearest .5 gms. Gold may be redeemed in form of bullion or imported hallmarked jewellery.

SPECIAL FEATURES

Retail network of banks all over the country,  10 cities to start with.