Dollar dives to new lows as treasury secretary reiterates ''strong dollar'' policy


4:39p ET Friday, December 3, 2004

Dear Friend of GATA and Gold:

Here is a long but wonderful story from a major
business newspaper in India about the booming
gold business there. The story has all the whir
and roar of it -- jewelry, the trend toward
monetary gold, and developments in marketing
the metal as well as futures trading.

The evidence of the story is that "schemes" --
the perfect word used by the Indian journalists
-- to extract metal from the populace in exchange
for paper promises are not yet terribly

This story is not likely to make happy reading
at J.P. Morgan Chase or Goldman Sachs.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

A New Gold Rush

By Surajeet Das Gupta and Deepa Krishnan
Business Standard, New Delhi
Saturday, December 4, 2004

Nothing exemplifies the growing lustre of gold
as much as its current bull rush in the market.

On Dhanteras day, for example, harried customers
heckled each other as they queued up for hours to
gain entry into Tanishq's outlet in south Delhi,
waiting to buy jewellery.

Executives in the retail store recorded an
astounding 3,000 footfalls on that day alone,
virtually double the numbers the previous year.
Sales that day were an all-time high record.

Nor was the rush limited to Delhi alone.
Tanishq's Bangalore headquarters has posted
the startling countrywide sales for this day
at over Rs 26 crore, up by over 30 percent
from last year.

The yellow metal is an attractive investment
once again, thanks to the steep rise in gold
prices (due to the weakening dollar) and the
increasing availability of institutionalised
ways to buy and sell gold. The gold rush is
reflected in the country's two commodity
exchanges, Multi Commodity Exchange (MCX)
and National Commodities and Derivatives
Exchange of India (NCDX), where futures
trading in gold began a year ago.

Volumes have since increased dramatically
from a mere 100 kg in gold to the current
over 10,000 kg a day. Says Joseph Massey,
deputy managing director in MCX: "Both
gold and silver are currently among the
most liquid commodities in the futures

Hyderabad-based Karvy Commodities Broking
Pvt Ltd, which manages retail investors
who trade in commodities, says that as
much as 70 percent of the trading volumes
of its clients is in gold and silver.

Banks too have jumped on the gold bandwagon.
Corporation Bank and Indian Bank have
started offering loans to customers to buy
gold on easy EMIs. ICICI Bank is hawking
gold coins in the retail segment as an
attractive investment tool; it hopes to
nearly double its sales to 2 tonnes by
the end of this financial year, hitting
the Rs 140-crore mark.

Says Anup Bagchi, general manager for
retail liabilities, ICICI Bank: "The huge
increase in demand is because consumers
now have a branded, quality product with
ensured purity."

ICICI Bank sells its gold in small
denominations of 5-10 gm coins, making it
easy for even small investors to park
their money in gold. Tanishq, a division
of the Tata-controlled Titan Industries,
has seen a 100 percent increase in its
sale of gold coins this year over last

The company hopes to sell coins alone
worth Rs 30 crore. And Harish Bhat,
chief operating officer, jewellery
division, Titan Industries, says he
expects to end the year with a 45
percent increase in sales of gold

There are many others who are indirectly
cashing in on the gold boom. Delhi's
Gold Souk, the country's first jewellery
mall in Gurgaon, is experiencing amazing
footfalls of 2,500 customers on average
over weekends.

Says G S Pillai, president, Gold Souk:
"That is a huge number, considering that
the conversion rate of footfalls into
sales is almost 100 percent."

No wonder Gold Souk is on overdrive. It
has already sold almost 60 percent of
its 1.1 lakh suare-foot space in the
jewellery mall, and is now working on
setting up nine similar malls across
the country at an investment of under
Rs 400 crore. Talks are also on with
commodity exchanges to use the premises
for trading in gold and silver.

At a macro level too, the numbers clearly
show phenemonal demand for gold in India
this year. The World Gold Council (WGC)
estimates that consumer demand for gold
between July-September this year went
up by 28 per cent in rupee terms and 16
percent in tonnage terms over the
previous year. Compare that with a mere
3 percent growth in 2003 over the
previous year in tonnage terms and the
hunger for gold becomes evident.

More importantly, Rajan Venkatesh,
Indian director of bullion for Nova
Scotia Bank, says: "The peak season for
buying gold lasts from October to March,"
indicating the trend is likely to contnue
well into the new year.

Interestingly too, the offtake of gold
for purposes of investment (in bars,
coins, etc.) has been growing faster than
jewellery. Between January and September,
gold offtake in rupee terms went up by
21.6 percent as compared to 19.9 percent
for jewellery.

Trends in previous years indicate that it
was jewellery that enjoyed an edge over
bullion. That trend has been reversed this
year. Last year, gold for investment
peaked at 90 tonnes but WGC estimates that
it would clear the 100-tonne mark, which
constitutes about a fifth of all gold
imported to India.

There are sound reasons for the new lease
of life that gold is enjoying. Suggests
WGC managing director Sanjiv Aggarwal:
"The rise in gold prices, the fear of
potenial inflation fueled by oil prices
(gold is a good hedge), and the need to
diversify risks, especially their
exposures in bonds and shares, and an
overall strong economic growth have
prompted the demand for gold this year
in India."

Gold prices skyrocketed this Thursday,
hitting $456.75 after remaining stable
at around $450-455 the last few days.
Analysts say a correction could be in
the offing despite the massive current
deficit in the US, after which it will
again be on the upswing. Similarly, in
India gold prices have shot up by
nearly 17 percent from around Rs 5,675
in mid-May to over Rs 6,635 for 10 gm
on Thursday.

From another plane, absolute return on
gold based on closing prices in the
NCDX for a six-month period ending
November 20 was as high as 13.68
percent -- surely more attractive than
many other investment instruments.

Elaborates V. Sivaramakrishnan, an
analyst at Karvy Commodities: "In the
past six months the returns have been
about 14 percent. On an annualised basis
this means 30 percent. That is as
attractive as the stock market."

Experts expect the prices to firm up
further. Says Mumbai-based bullion
consultant Bhargava Vaidya: "In the short
term, over the next four months, gold
could trade at $415-450 but could touch
$500 later -- depending on the political
and economic situation in West Asia."

Avers Krishna Nathani, head research at "One should wait for
gold to get back to $430 levels, where
people could once again begin
investments. This would help in sustaining
the rally." He suggests that up to 30
percent of one's portfolio could be
invested in gold and silver.

Apart from the upside, buying and selling
of gold is becoming easier as the gold
market gets increasingly more
institutionalised support. Corporation
Bank, for instance, has floated a "Corp
Mahila Gold" scheme that allows individuals
loans to buy jewellery up to Rs 50,000
with no alternate security payable in
EMIs at interest rates ranging from
10-12.25 percent.

Says a senior executive of the bank: "We
hope to grow this scheme in a big way but
are initially looking at a small target of
Rs 10 crore this year. Our main target is
to attract the salaried working women."

Tanishq has a "Gold Harvest Scheme" under
which customers can make a monthly deposit
of Rs 500 for 12-18 months (you get Rs
6,300 back on a 12-month deposit). The
company pays out between 7-9 percent
interest on the deposit as bonus but the
money has to be used for buying jewellery
or gold in its stores.

Says Bhat, "We have already enrolled over
30,000 depositors under the scheme."

Commodity exchanges are also making it
easier for small retail investors to
trade in gold. Both exchanges offer a
100-gm contract (apart from 1 kilo) for

NCDX chief business officer Narendra Gupta
points out: "The 100-gm contract is safer
for retail investors who genuinely hedge
the prices, and are allowed to make
smaller investments by just paying the
margin of 5 percent of the total value
(a 100-gm bar would cost Rs 66,000

Karvy's Sivaramakrishnan adds that this
is the key reason that makes futures in
gold more attractive than investing in
the stock exchange. "Compare this to the
stock market, where margins could go up
to 25 percent, depending on the company.
So the risks as well as the upfront cash
required are more," he says.

More importantly, buying gold with
authenticated purity levels is no longer
a Herculean task. ICICI Bank, for instance,
sells gold coins with 99.9 per cent purity
(the highest purity for gold).

In order to provide liquidity to coin buyers,
the bank is now working on a scheme by which
it will offer loans against the gold coins.
Also, to make gold purchases for investment
more popular, the bank recently introduced
a one-gm gold pack. Bagchi says it was
targeted essentially at smaller towns.

If gold is winning back its glitter, it
is also because agencies like WGC are
aggressively promoting its popularity
in the marketplace. Aggarwal says
research shows that Indian women always
need an occasion to buy gold. WGC is
working on creating and promoting more
such occasions apart from the usual
Dhanteras, for instance.

This year, the council has already
created a special campaign and organised
jewellery festivals to woo customers to
buy gold during Akhtirth, a religious
occasion in south India.

The result: as much as 12 tonnes of gold
were bought during the festival week in
that region. It has virtually doubled
the number of shopping festivals that it
organised for jewellery this year and is
aggressively promoting its "Speak Gold"
advertising campaign.

Yet, many hold a contrarian view.
Mumbai-based broker Sunil Dholakia says
only 5 percent of his 3,500 clients trade
in gold. "I don't see anyone moving his
money from the stock market to gold
unless things go really bad. Trading in
gold is too complicated to attract
attention," he claims.

Dholakia also says that jewellers who
indulge in cash transactions and make
money mixing gold find no need to play
the futures market.

Also, fancy schemes to draw out gold
locked away in homes have failed. For
instance, several banks (like State Bank
of India) started the gold deposit
scheme (under which you were paid
interest for depositing your jewellery
with the bank) but it has not taken off.

Says a senior banking official of one of
the banks which run the scheme: "It is
a failure as depositors are reluctant to
part with their gold, which is not
returned to them as jewellery but in a
gold bar. Another issue is that we cannot
assess the gold quality.

Vaidya points out that with the rupee
appreciating vis-a-vis the dollar, the
actual gains on gold are going down in
the local market as India is a net
importer of gold.

"Fresh investments in gold can be made
if the rupee levels are defended by the
RBI to arrest the appreciation," he
points out.

Avers a senior executive of MMTC: "Gold
sales have dampened because of the high
price." Even WGC admits that demand in
November and December might slow down due
to high prices -- though overall growth
will not be affected.

But with most analysts of the view that
gold prices will only move higher over
the next few months (after a small
correction), the shine of the yellow
metal on the minds of the Indian
customers does not seem to be fading --
at least for now.

India is dependent on imports for most of
its gold, therefore fluctuations in the
international prices have a direct bearing
on gold prices in India.

The current bull run in gold prices is a
result of the weakening dollar. Typically,
when the dollar falls in value relative
to other currencies -- as is happening now
-- dollar-denominated stocks and bonds
tend to lose value for foreign investors.
They have no alternative but to take
recourse to buying gold.

Says Sanjiv Aggarwal of WGC: "With the
dollar weakening, no alternative currency
has substituted the dollar. Gold is
therefore seen as an effective option."

Secondly, there is a direct relationship
between the hike in oil prices and gold
prices. With inflationary pressures due
to the oil price hike, gold becomes an
effective hedge against inflation.

More importantly, gold supplies are
under strain. Overall supply of gold in
the market was sharply reduced in
July-September by 22 percent over last
year in the same period.

That is because mine production fell
due to landsides in Indonesian mines,
the selling of gold by central banks all
over the world was much lower than in 2003,
and South African mines opted for
de-hedging. Simply put, that means they
are not getting into contracts with
suppliers to sell gold in the future, and
that is affecting supply sentiments.


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