Are Indian consumers really falling out of love with gold? – Survey

Gold demand in India, one of the world's leading buyers, is likely to fall by at least 4% in volume in 2012, as higher inflation trims disposable local income, according to the latest research report by Morgan Stanley.

Morgan Stanley Research's AlphaWise evidence expects volume demand to drop 13% for urban India, but rise 4% for rural India.

Beyond financial issues, what is really driving Indian consumers to buy less gold, says the report quoted by The Times of India, there are a number of other influencing the decreasing demand. These range from perceived safety of the investment, social status, life events and fashion.

The global bank 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 says 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, mainly because the majority of Indians buy gold for weddings, family functions and festive seasons.

India's gross domestic product (GDP) is inching closer to $2 trillion, which means the value of gold held by locals comprises nearly half of the country's GDP.

Some key findings:

• India’s gold demand is expected to fall by 4% in volume in 2012 and rise 4% in value terms. (India roughly imports 800 to 1000 tonnes of gold each year).

• Households are increasingly channelling their investment demand through bars/coins. The survey suggests a 2-3% increase in share of bars and coins this year. The World Gold Council puts bar/coin share at 39% in 2011 – a record high. This indicates the investment in gold for investment.

• Gold accounts for one-third of the household investment portfolios surveyed. They are likely to decrease this marginally in 2012 in favour of fixed deposits. Households cite better returns and “safety” as the key reasons to invest in gold.

• Households are expecting gold prices to rise by 8% in 2012. An additional 10% rise would lead to a proportionate decline in volumes. The survey suggests that the value of gold demand is only marginally affected by prices – a debatable matter.

• About 82% of the households in rural India prefer traditional jewellers to 41% for urban India. In rural India, traditional jewellers account for 80% of gold transactions. The choice of jeweller is a function of trust (in terms of quality assurance and relationship). Location of the jeweller is an important aspect to gold purchasing behaviour.

• About 13% of the households have taken loans against gold in the past year, with a slightly greater prevalence in rural India. Some 60% of rural households choose the unorganized sector for taking gold loans, while urban households prefer banks. 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 15-20% range.

But Morgan Stanley’s report seems in contradiction with other industry leaders’ views, such as Doug Casey’s, chairman of Casey Research.

“One month we're told demand is up, and the next it's supposedly down. I'm not suggesting that official reports are inaccurate, but it is admittedly confusing and doesn't help us understand the real trend in the country,” he wrote in March.

Read what he thinks about India’s gold demand future here.