Presented at the conference by India Gold Policy Centre at IIM Ahmedabad

Gold & Gold Markets 2020, February 7th and 8th

Venue: India Habitat Centre, New Delhi

“A GOLDEN DEATH OF DOGMA TO INVEST IN GOLD: A NEW INVESTMENT APPROACH TO TRANSFORM THE SECTOR WITH

RESPECT TO CONSUMER BEHAVIOUR”

BYDr. Jita Rani Udgata,

GJEPC, Mumbai&

Dr. Sudhi Ranjan Dash, Strategy Consultant & Chairman, Assured (NGO)

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• Gold the king of metal is unique for its durability, malleability andits ability to conduct both heat and electricity.

• The world history also says, throughout our planet, almost everyestablished culture has used gold to symbolize power, beauty,purity, and accomplishment and we Indians believe gold as oneforms of currency.

• Around 24,000-25,000 tonnes23 (WGC-report, 2019) of gold isthere in Indian households predominantly in the form ofjewellery. However, total gold imported as a raw material is979.93 tonnes in the form of gold bar in the year 2018-19.

INTRODUCTION

Cont….

• The importance of this metal is high because of its multiple uses likeindustrial applications in dentistry, electronics, beauty products as well assome ayurvedic medicine, apart from making jewellery.

• Gold in jewellery form is very famous for its cultural heritage/aestheticvalue since the Ramayana & Mahabharat era.

• The world’s biggest official gold holder is U.S., with 8,134 tons more thanfour times as much as China (1,808 tons), more than five times Russia’s1,499 tons followed by Germany with 3,380 tons, the InternationalMonetary Fund (IMF) itself with 2,814 tons, Italy with 2,452 tons andFrance with 2,436 tons23 (WGC, 2019). In India it is regarded as auspiciousand used in social and cultural customs and traditions.

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An Overview of Gold Demand India Vis-a-vis World:

• Worldwide gold demand amounted to 4,345 metric tons in 201815.Demand has been noticeably higher since the Financial Crisis. Manyinvestors look to gold in periods of market turmoil because they believe thatit holds value through recessions better than other assets.

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Gold Demand in Metric Tonnes for Two Conjugative Years

Sl. No Gold Demand 2017-2018 2018-2019 %Growth

1 India 953.15 979.93 2.81

2 World 4071.7 4345.1 6.71

Source: M. Szmigiera, 2019

Gold Consumption in India in Different Form

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(Year 2010- 18 in Tonnes)

Sl. No.

Gold Consumption

in Tonnes 2010 2011 2012 2013 2014 2015 2016 2017 2018

1Jewellery

Consumption 683.3 620.9 617.5 616.2 627.5 662.3 504.5 601.9 598

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Retail Investment (bars and

coins) 296.4 334.4 322.3 337.5 206 194.9 161.6 169.3 162.4

3 Gross Scrap 220 255 300 205 185 180 170 175.2 179

AN OVERVIEW OF GOLD DEMAND & SUPPLY IN INDIA:

• Domestic demand for the yellow metal is

influenced by the fluctuating rupee rate,

which continued to play second fiddle to

the dollar.

• Customs duty and other local taxes also

play a significant role to decide the

domestic price as well as control the

demand and supply.

• From this trend, it is observed that

increased duty and tax has a negative

impact on gold demand & supply .

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Table: Gold Import Trend of India (in Tonnes)

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Sl.no Year Gold Imports in Tonnes % Increased YoY

1 1999 390 0

2 2000 394 1.02

3 2001 495 25.77

4 2002 573 15.78

5 2003 354 -38.20

6 2004 629 77.72

7 2005 440 -30.11

8 2006 399 -9.39

9 2007 434 8.82

10 2008 647 49.23

11 2009 644 -0.48

12 2010 947 46.94

13 2011 1005 6.17

14 2012 915 -8.93

15 2013 760 -17.02

16 2014 779 2.60

17 2015 1038 33.17

18 2016 655 -36.87

19 2017 1031 57.37

20 2018 942 -8.65

Gold Imports in India and Rate TrendYear Price (24 karats per 10 grams) Year Price (24 karats per 10 grams)

1964 Rs. 63.25 1992 Rs. 4,334.00

1965 Rs. 71.75 1993 Rs. 4,140.00

1966 Rs. 83.75 1994 Rs. 4,598.00

1967 Rs. 102.50 1995 Rs. 4,680.00

1968 Rs. 162.00 1996 Rs. 5,160.00

1969 Rs. 176.00 1997 Rs. 4,725.00

1970 Rs. 184.00 1998 Rs. 4,045.00

1971 Rs. 193.00 1999 Rs. 4,234.00

1972 Rs. 202.00 2000 Rs. 4,400.00

1973 Rs. 278.50 2001 Rs. 4,300.00

1974 Rs. 506.00 2002 Rs. 4,990.00

1975 Rs. 540.00 2003 Rs. 5,600.00

1976 Rs. 432.00 2004 Rs. 5,850.00

1977 Rs. 486.00 2005 Rs. 7,000.00

1978 Rs. 685.00 2006 Rs. 8,400.00

1979 Rs. 937.00 2007 Rs. 10,800.00

1980 Rs. 1,330.00 2008 Rs. 12,500.00

1981 Rs. 1,800.00 2009 Rs. 14,500.00

1982 Rs. 1,645.00 2010 Rs. 18,500.00

1983 Rs. 1,800.00 2011 Rs. 26,400.00

1984 Rs. 1,970.00 2012 Rs. 31,050.00

1985 Rs. 2,130.00 2013 Rs. 29,600.00

1986 Rs. 2,140.00 2014 Rs.28,006.50

1987 Rs. 2,570.00 2015 Rs.26,343.50

1988 Rs. 3,130.00 2016 Rs.28,623.50

1989 Rs. 3,140.00 2017 Rs.29,667.50

1990 Rs. 3,200.00 2018 Rs.31,438.00

1991 Rs. 3,466.00

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• Apart from a few lows between

some years, the table indicates

that the gold price trend has

historically been on the rise.

• This constant appreciation is

one of the biggest reasons that

the Indians are confidently

investing in gold and more

inclined towards this than any

other investment.

Source: bankbazar.com, 2019

SECTORAL CONTRIBUTION TO INDIAN ECONOMY

• Gem and Jewellery sector contributes around 7% in total GDP of theCountry.

• This sector has engaged not less than 5 million employees.

• Most of the employees are not even literate and technically skilledemployees. However, they are very artistic, and designs produced bythem are based on Indian culture/heritage.

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Table: Contribution of Gem & Jewellery Sector in

Indian economy (Year 2019)

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Particulars Amount / %

G&J sector contribution in economy’s GDP 7%

Generation of employment Around 5 million

Total exports of gem and jewellery products Around US$41 billion

% share in India’s total merchandise exports Around 14%

% share of plain gold jewellery from total

World gold jewellery export Around 11% (4th Rank)

Source: GJEPC, 2019

OBJECTIVE OF STUDY

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• To create awareness among investors on various gold investmentprocess.

• To find out the pros and cons for the investment of gold.

• To find out the requirement of policy changes as per therequirement of consumers.

• To find out an innovative marketing approach that influences theconsumer behavior to invest in gold.

METHODOLOGY

• This is an analytical research based on the secondary data.

• The data is collected from different authentic sources including Government sites, research journals, news clips and magazines.

• There are two case studies to corroborate our research and tounderstand the consumer’s behavior for investment in gold.

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ANALYSIS & INTERPRETATION FOR PREFERENCE OF GOLD AS AN INVESTMENT BY CONSUMERS

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A. Different Aspects of Gold as an Asset Other Than Jewellery

a) Gold, a Quasi Currency:

• In developed nations, the yellow metal continues to have a strong impacton the value of those currencies. That means there is a strong correlationbetween its value and the strength of currencies trading on foreignexchanges in comparison to other currency.

Commodity ETFs:

• ETFs are a convenient and liquid means of purchasing and selling gold.

• Investing in ETFs doesn't give you access to the physical commodity, so you don't have a claim on the metal in the fund.

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Cont…Common stocks and mutual funds:

• Shares of precious metal miners are leveraged to price movements in the precious metals.

• It is little difficult to handle without proper knowledge. However, fund-managers can do the

necessity on behalf of consumers (investors).

Bullion:

• Coins and bars are strictly for those who have a place to put them like a safety deposit box or shelf.

• Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a

time horizon, bullion is illiquid and downright bothersome to hold.

Certificates:

• Certificates offer investors all the benefits of physical gold ownership without the hassle of

transportation and storage.

• If you're looking for insurance in a real disaster, certificates are just paper. Don't expect anyone to

take them in exchange of anything or any value.15

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b) RBI: A reason for CAD:

• Reserve Bank of India proposed steps to curb gold demand in the country todiscourage imports as gold import is directly proportional to Current AccountDeficit.

• Basically, these steps are aimed at reducing speculative trades by curbing the importof physical gold into the country..

C) Doctors:

• Gold is used in dentistry because of its superior performance and aesthetic appeal.

• Gold alloys are used for fillings, crowns, bridges, and orthodontic appliances. It isused in dentistry because it is chemically inert, nonallergenic, and easy for thedentist to work.

• Particles of a radioactive gold isotope are implanted in tissues to serve as a radiationsource in the treatment of certain cancers.

• Small amounts of gold are used for remedy of lagophthalmos, which is an inabilityof a person to close their eyes completely.

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d) Electronic Devices Manufacturing:

• Gold is the highly efficient conductor that can carry these tiny currents andremain free of corrosion.

• Electronic components made with gold are highly reliable.

• Gold is used in connectors, switch and relay contacts, shoulder joints,connecting wires and connection strips.

e) Jewelers: Imitation jewellery is hazardous for health because of the metalsused like Nickel, Zinc, Cadmium, lead etc.

f) Consumers: One fundamental factor to decide by the consumer to invest ingold is safety and it can be liquidised and converted into money without anydepreciation in any part of the world at any time. The fundamental mind setbehind gold for a woman is old age financial support as they depend on theirchildren. This is one factor which is motivating the children to take care of theirold parents (which is a general perception).

B. Awareness on Where One Should Invest• The psychology analysis of the investors given in the below table. When we analyse carefully, the

table says that gold is a poor/ middle class people’s investment for their hard time.

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Sl. No. Parameter Real Estate Gold

1Size of investment Relatively large investment required

Smaller amounts of investment are possible. Ex: 1gm

gold (Rs. 3800/-)

2Tenure Ideal for long-term investments

Best suited for short-term investments. (on emergency it

can in-cash immediately).

3Earning potential

Can generate regular monthly

income through rent

Returns fluctuate with the market. However, historically

depreciation never comes to the picture.

4 Liquidity Not easy to liquidate Easy liquidity

5 Volatility Low volatility High volatility

6 Portability Not Portable Portable

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Pre-investment

understanding

Requires research and understanding

of market

Quality and valuation are transparent. There is assaying

machines, which can be produce the quality testing

certificate in few minutes.

8 Tax benefits Structured tax benefits Attracts capital gains in tax

9 Economic impact Good for growth of economy Adverse impact on economy

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Environmental

impact

Very negative on climatic change.

Like ground water level going down,

rain scarcity, global warming etc.

No impact in climatic change at all.

Source: Roof and Floor, 2017

C. Pros and Cons for The Investment of Gold

• We have taken two case studies. One from real estate and another from a financial institution to corroborate our study and analysed the pros and cons of different investment process.

• CASE 1- Based on financial institution

• CASE STUDY II- from real estate

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CASE 1- Based on Financial Institution

Impacts on Consumer’s (Investor) Psychology and Learnings:

Consumers (Investors) could be at risk in any point of time by investing in any cooperative

bank for higher return, as these institutions are not mandatorily coming under the RBI’s

purview and Central banks cannot restrict themselves for ethical practices;

Investors are now in a state of mind, not to put all their eggs in one basket (means

investing in a single bank). Financial advisors also suggested that savers should hold

multiple bank accounts with co-operative banks, private banks and public sector

undertaking (PSU). Not more than 10% of your financial assets should be parked in a co-

operative bank.

However, managing multiple accounts is again an additional burden.

Therefore, the easy, secured and non-depreciated investment option left out with the

investors is in gold.

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CASE STUDY II- on Real Estate • RERA is not implemented completely by all states. Some states implemented

(Maharashtra) but diluted the rules as per their convenience which hurt buyers’(consumers) confidence.

• Consumers realise that liquidation of the property in their hard time for money isvery difficult, if the market is slow. That mean the liquidise property is directlyproportional to the market condition.

• Benami Property Act is another point, which discourages the consumers forbuying property as they must declare their income and pay their tax, whichgenerally they do not want.

• Consumers believe in short term and certainty in investments, rather than in anyrisk-based project.

• Gold is lot more portable than real estate and easy to liquidise.• Hence, they find gold is the safest and sound process for their investment.

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Major Regulating/Policy Issues:

Government instead of initiating new enterprises is trying only to coordinate activities & individual

initiatives.

The current GOI emphasis is on “The less you govern, the better you govern”. However, this only a

statement. The policy and procedure for gold is cumbersome as well as interpretation defers from officer to

officer, which impacts directly on the buying/selling of gold in any form.

High rate of import duty and GST also a major discouraging point for the consumers.

The Government Rule of compulsory PAN card submission for purchase of more than 2 lakhs value of

jewellery as well as the quantity fixed per head discourages the consumers.

Government introduce Hallmark as mandatory for every piece of jewellery to confirm the standard (carat

value). However, Hallmark centres are not full proof to provide the accurate report and the retail jewellers

are taking the benefit of this and cheating the consumers. So, government should introduce a policy to

address these issues. Simultaneously Bureau of Indian Standard (BIS) do the due diligence to make all the

hall marking centres well equipped to deliver up to the mark.

There is no effective e-commerce policy for the easy trading of gold jewellery which is one of the easiest

and frequent buying behaviour of young consumers (millennial).

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An Innovative Marketing Approach to Influence Consumer’s Behavior :

a) Implementation of “Kaizen” (continuous improvement) Theory:

• kaizen means ‘continuous improvement,’ and has been used extensively inproduction.

• It helps to deal with three problems: managing fear, helping you to change andhelping others to change.

• The three changes bring innovation in manufacturing, adapting consumers demandand consumer’s acceptance for the innovation.

b) Marketing Innovation:

• Every piece is a unique piece. Make your every single jewellery piece a brandedpiece by engaging your Eco-System.

c) Application of New marketing tools like E-Commerce:

• This industry has been majorly driven by factors such as growing base of internetusers, rising awareness among the users and lucrative prices of online jewellery.

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POLICY SIMPLIFICATION: The regulations regarding Jewellery Certificate need to be relooked keeping in view the need for

ease of doing business. It can be considered for simple registration process that can be done

online.

Department of Consumer Affairs may re-examine the desirability of the provision of making

jewellers responsible for under-cartage on the lines of practice followed in UK, set appropriate

responsibilities with Assaying and Hallmarking Centres (AHC) and take appropriate action while

keeping in mind the interests of the consumers.

Government should introduce e-commerce policy like other developed countries to encourage the

export as jewellery manufacturing is part of our culture and heritage. Jewellery is the best way to

make it reach in every corner of the globe.

Government should make the tax and duty refund procedure easier for all stakeholders.

Jewellery sector is a traditional sector. Government should support the manufacturing with

advance machinery and skilled labour to satisfy the millennial with varieties through some

schemes and user-friendly policy. Different government institutions and different interpretation

discourages the manufactures to run the business.24

All the government institutions (IT, DRI, RBI, BIS, Supplier Banks etc.,) should work on

integrated basis to facilitate the gold jewellery manufacture/retailer/other stakeholders for the

smooth functioning of the sector.

Digital payments should be encouraged by government through some tax incentives.

The following problems are needed to be addressed by Government of India concerned

department for digitalization of the industry:

a. Absence of a Standard Operating Procedure (SOP), through which the payment would be

guaranteed to the jewellery retail shops for digital payment.

b. Absence of a proper dispute resolution mechanism;

c. High transaction costs;

d. Non-availability of the acceptance infrastructure for credit cards;

e. Regulatory restrictions on EMI-based sale.

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SUGGESTIONS: • It is suggested to Consumers (investors) to purchase gold jewellery from the

known jewelers or the branded retail outlets, where they will get an assured standard of gold.

• Another important point is investors should go for more than 18 carat gold to get a better reselling value. However, best format of investment is gold bar & coin.

• It is also suggested to the consumers that they should buy the hall marked jewellery to get the legal standardized jewellery which will assure the reselling value.

• Hallmarking is compulsory for each piece of jewellery by BIS. Hence, BIS should introduce a policy that each Assaying and Hallmarking Centre will be responsible for determination of purity and fineness of the precious metal articles hallmarked by them.

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• There should be stringent penalty for unethical practices in context ofstandard/purity certification by AHCs.

• Hallmarking is essential for consumer protection. However, as thehallmarking is mandatory, the number of AHCs has to be increased andnecessary infrastructure (testing machines and skilled manpower) has to beput in place.

• BIS should plan and carryout awareness programmes for hallmarkingpreferably in each district across the country.

• Investors should invest, in gold ETF and souvenir bond, where possibilities oflosses are limited. ETF’s are available at ease and it does not need highknowledge, as it is very easy trading mechanism.

• Digital payment should be encouraged.

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CONCLUSION:• As per various studies 16,000 tons of gold is there in Indian households

predominantly in the form of jewellery.• The constant appreciation is one of the biggest reasons that the Indians are

confidently investing in gold and more inclined towards this than any otherinvestment.

• It is the only metals which can be liquidised and converted into money without anydepreciation.

• This study finds out the different forms of gold investment available to investors.There are various alternatives available for investment like jewellery, coins, bullions,ETF, mutual funds, E-gold etc. However, most preferred investment is ETF as wellas sovereign bond.

• Implementation of kaizen, Innovating marketing approach, e-commerce andsimplification of government policies will boost the morale of the consumer toinvest in gold which ultimately enhance the economic growth and development.

• It is also find out that there is a strong correlation between the value of gold and thestrength of currencies trading on foreign exchanges in comparison to other currencyfor which Government discourages investing in gold.

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Thank you..

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