In Gold We Trust

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In the cool
weather of the first few months of the year, India’s wedding
season swings into high gear. Indian brides and grooms of means
like to stage lavish celebrations, and on display at those nuptials
is another grand Indian love affair: gold, for which the country
has had a long-standing affection. India is the world’s biggest
consumer of the commodity, and much of it goes into women’s
jewellery.

Gold has been
a global star asset over the past five years, and with so many investors,
analysts and mining executives attempting to predict what will happen
next to its price, it’s never been more crucial to understand
the sources of demand for it. This makes the banquet halls of India
hard to ignore. Yes, the influence financial speculators and central
banks have on the price of gold is intriguing, and often dramatic
in the short term, but straightforward consumer demand is still
the largest factor.

According to
the World Gold Council, which represents 27 major gold producers,
68% of the worldwide demand for bullion over the five years from
2004 to the end of 2008 was for use in jewellery, compared with
just 19% for investment purposes and 14% for industrial uses. On
a geographic basis, the council says that East Asia, the Indian
subcontinent and the Middle East accounted for 70% of global demand
in 2008.

In India and
that other gargantuan gold-loving country, China, the traditional
affinity for keeping a large portion of family wealth in the metal
remains as strong as ever. As people’s personal incomes increase
in those two countries and in other developing nations, the middle
classes will save more, thereby boosting demand for gold and sustaining
its price. India’s annual economic growth rate has averaged
8.6% over the past five years. Although the pace has slowed recently,
it will likely return to that level by 2012.

The National
Spot Exchange, a major commodities exchange based in Mumbai, estimates
that Indians already have close to 25,000 tonnes of bullion, coins
and jewellery stashed away in private vaults. That’s a large
proportion of the Gold Council’s estimate of the entire holdings
of gold worldwide: 163,000 tonnes.

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March
30, 2010

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