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Gold brings stability, acts as insurance, and generates higher risk-adjusted returns especially in times of heightened uncertainty

12 april 2021

Somasundaram PR (Som) joined the World Gold Council in January 2013, as Managing Director, India. Based in Mumbai, Som is responsible for leading the World Gold Council's activities across the Indian gold market.

Som has over 27 years of experience across diverse industries including the FMCG and banking sectors. Before joining the World Gold Council, Som was the Chief Executive Officer of a regional private bank and earlier to that, he was with Standard Chartered Bank in India for over eight years in various senior roles as a member of the Management Committee.

Previously, Som had spent over 13 years with Hindustan Unilever (HUL) in a variety of roles in financial management, logistics and M&A. He is a qualified Chartered Accountant.

Here, in an exclusive Interview with Rough&Polished, Som walks you through the Indian Gold Sector, envisaging a bright future for the industry going forward.

India’s gold imports have been negatively impacted in recent months, given the difficult circumstances. Do you see any improvement in the coming months? On the whole, where does the Indian gold sector stand right now?

The pandemic-induced lockdown caused global trade and supply chain operations to come to a standstill for a major part of 2020, leading to a fall in gold imports to the country. However, imports have resumed and trade revival visible as we return to normalcy, albeit slowly. The recent cut in import duty on gold that cut overall taxes on gold by 2.19% has been positive for the organised and compliant players in the bullion and gold jewellery market. The sector is looking forward to pent-up demand on account of rescheduled weddings, missed celebrations and higher middle-class savings on account of lock-down to drive growth.

Barring the first few months of lockdown, it’s said that demand for jewellery was fairly good in Asian markets, including India. Analysts think high gold prices in India led to a reduction in jewellery demand but see pent-up demand in India. What are your thoughts?

India’s gold demand dropped by over a third in 2020 settling at 446.4 tonnes, on the back of COVID-induced lockdowns and lifetime high prices. However, the drop was significantly lower when viewed in value terms, 14% lower than 2019 as prices were up 34% hovering around INR 50,000/10 grams for most past of the year. Jewellery demand fell 42% to 315.9 tonnes in 2020, mainly due to pandemic related restrictions. However, in Q4 2020, the festive period and the ensuing wedding season revived hopes and drew in jewellery demand worth 137.3 tonnes—the strongest quarter in the year. Predictably, as lockdown eased and normalisation efforts were phased in, imports in Q4 rose 19% year-on-year, pointing to the positive impact of pent-up demand. This can be expected to continue in 2021 as further normalcy returns and a steady course of reforms strengthens the industry. This duty cut, though marginal, will give a boost to trade sentiment. However, recent softening of prices (to INR 44000/10g) due to a combination of lower global prices, duty cut and stronger rupee have made consumers wary of entering the market in a big way – as they naturally await strong signals about price movements one way or the other.

Studies say that demand for gold jewellery has risen in India in recent years as youngsters have become more investment-savvy. But is the jewellery demand in India solely investment-led or for personal consumption or both? Your comments?

Jewellery in India plays a dual role, as an ornament and as a family investment vehicle. In times of need, loans against jewellery are a common means of tapping liquidity. The total gold loan (against jewellery and coins) market in India is large and is estimated at US$ 30 billion, with a fair share through organised, regulated institutions. This dual-purpose is one reason why Indian households prefer jewellery of high caratage and lower caratage “design” pieces that do not have a big role in capturing gold savings. Also, India’s jewellery market relies heavily on handcrafting skills that date back centuries.

The World Gold Council’s ‘Retail Gold Insights: India Jewellery’ report reveals that gold jewellery purchases are commonly driven by a need for financial value and ease. Gold jewellery is the second most popular item they own when compared against a range of other fashion and lifestyle products with 60% of them owning it.

But as with many societal and cultural habits in the modern world, changes are advancing. This research also indicated that there is a risk of gold jewellery losing its connection with younger audiences as experiences and electronics occupy greater mind space. Gold jewellery also faces challenges from perceptions that it is a traditional necessity and not versatile enough for modern Indian women. The industry is at the cusp of significant transformation with investment behind a brand building and compelling marketing campaigns.

Should an average investor be cautious while investing in gold at present? What is the advice…bars, coins, or plain gold jewellery or studded jewellery? In India especially, bars and coins are preferred because of the (wastage) loss while selling jewellery. Your opinion?

Not really, gold investment should be viewed in a long-term context. Gold is inversely correlated to most financial assets like equities and bonds which have an annual coupon or dividend yields. Gold provides liquidity with no credit risk, acts as an excellent diversifier and enhances overall wealth performance. It brings stability and acts as insurance and generates higher risk-adjusted returns especially in times of heightened uncertainty. Retail investors are largely driven to invest in gold as it acts as an effective diversifier that works, which makes them cap allocation within a range. The cultural link with gold, though facing a mild risk, ensures that it is perceived as a hedge against inflation, insurance against uncertain times and an inter-generational asset.

Gold’s performance is intertwined with its unique nature as a consumer good and investment asset. And it is linked to the interaction of four key drivers: economic expansion, risk and uncertainty, opportunity cost and momentum. The current crisis is unprecedented, and gold has a critical role in a typical portfolio, depending upon one’s risk appetite, time horizon and return requirements. Given the global and financial uncertainty, low-interest rates and debasing currencies, gold is a much-needed asset class for an average household to weather any possible storm. Our extensive analysis has illustrated that a range of 6-17 per cent of gold allocation to an Indian-rupee based portfolio would boost risk-adjusted returns and deliver tangible improvements on a sustainable, long-term basis.

While gold jewellery is prevalent in households and is inherent to the Indian culture with bars and coins providing an alternative, the road ahead would see credible thrust on digital gold, making it easier to access, 24x7 and in micro-units. The ability to trust jewellery for its purity, fair practices, ESG credentials and other socially relevant themes will shape millennial behavior positively towards gold and the industry is slowly waking up to these slow but steady changes.

Of late there have been many options available including digital gold, besides the traditional investment in physical gold. But most Indians are comfortable investing in physical gold. However, with Gen Z enters the investment arena, do you see this mindset changing going forward?

Yes, digital is also “physical” gold held in an allocated form. It provides ease of access, the ability to save in factions, almost 24x7 availability, a reassurance of purity and source of supply and issues that are of interest to a new generation of investors. Digital gold platforms, currently three, have grown impressively particularly during covid when people wanted to put their savings in gold, but logistics did not permit physical buying. This is yet a nascent category and the overall size is small but with many value-add features and a regulatory framework that is likely to bring more credibility, digital gold can grow exponentially. As millennials and Gen Z embrace the next wave of a digital revolution, gold will not be left behind. Digital could over time, support brick-and-mortar jewellery stores by promoting higher and faster gold accumulation, ahead of eventual conversion into jewellery.

The gold sector in India may be more organised in terms of governance with a gold exchange and a bullion board, according to industry members. And what’s the current status with the government’s national gold policy? Your views please?

Yes, gold market reforms in recent years have gained traction. A comprehensive policy announcement may perhaps be expected in the future, but the various initiatives taken do fit a pattern that point to an intent to make this industry more transparent, organised and become an export and growth engine - enabling it to leverage its strengths to become the jeweller to the world.

Mandatory hallmarking, establishment of the bullion exchange in GIFT City, making SEBI the central regulator for domestic gold exchange trading, the inclusion of gold jewellery under the ambit of PMLA, and most recently, a revival of the monetization scheme, are all positive steps in the right direction. It will augment trust and transparency in the gold industry, making it the cornerstones of progress and growth for gold in the coming years. An organised and transparent bullion market will benefit the entire supply chain, particularly small players, exporters, and our famed handicraftsmen. It will lead to more jobs in assaying and purity verification which in turn will support the gold monetisation scheme while also supporting the broader economy through job generation and upskilling.

Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough&Polished