Gold, silver safe havens of investing

Rajan Ramakrishnan, who worked for over 30 years with a UAE power utility, is settling down in his hometown in Kerala. He has refurbished his home, bought an SUV and started a small bakery and coffee shop. He has invested in Post Office Savings Scheme, put some money in mutual funds, and bought health and pension plans. However, Rajan and his wife, Parvathy, are worried about low returns from bank deposits. They are also concerned about risks associated with mutual funds. Their two daughters, 19 and 21, are studying in Canada and England, respectively. Their next dream is the grand wedding of the daughters. “Gold and jewellery will cost at least 20-30% more when they wed after three-four years,” says Rajan.

So, when Covid-19 second wave was at its peak and prices of gems and jewellery were crashing, he invested in a gold and diamond plan of a leading gems and jewellery chain. He will pay instalments for three years and on maturity can buy jewellery and diamonds at prices prevailing at the time of enrolment. “It is a good bet from savings point of view,” he says.

Like Rajan, numerous people in India are looking at gems and jewellery and other precious metals as a long-term investment option. With returns from traditional investment avenues such as mutual funds getting riskier and fixed deposits yielding little, the trend will increase, say experts.

A Safe Haven In Uncertain Times

“Gold jewellery has dual benefits. It is a beauty product as well as store of wealth. Gold is perceived as a strong hedge against inflation and has always been a very liquid asset. Covid-19 has, in fact, reinforced consumers’ trust in gold as a safe investment as, in hard times, it can be easily exchanged for cash,” says Colin Shah, Chairman, Gem and Jewellery Export Promotion Council.

Data from the World Gold Council (WGC), which tracks global gold and jewellery sales at wholesale level, confirms this. Despite the economic turbulence unleashed by Covid-19, jewellery demand in India rose from 117.9 tonnes, valued at ₹45,580 crore in first half of 2020 to 157.6 tonnes, valued at ₹66,850 crore, in first six months of 2021, a 34% increase in volume and 47% in value. Demand for gold as an investment grew from 47.9 tonnes, valued at ₹18,600 crore, in first six months of 2020, to 58.5 tonnes, valued at ₹24,840 crore, in first half of 2021, a rise of 22% in volume and 36% in value.

Globally, investment by individuals in bars and coins (one-kg and below gold bars and gold bullion coins) rose 4% to 899.5 tonnes in 2020 from 866.6 tonnes in 2019, despite lockdowns. Gold exchange-traded funds (ETFs) and similar products which can be traded on stock exchanges grew an unprecedented 114% from 407.9 tonnes to 873.8 tonnes in 2020. Over-the-counter trading and exchanges account for most gold trading volumes. In 2020, average daily trading volume on spot and futures exchanges was $69.3 billion, while gold ETFs’ average trading volume was $3.3 billion. India’s contribution was just $1.2 billion and $3.4 million, respectively, as Indian investors are yet to enter this market in a big way. However, India’s gold ETF holdings increased 30% to 35.1 tonnes in Q3 of 2021, from 27 tonnes in the year-ago period.

In order to encourage investments in this sector, the government has reduced import duty on gold and silver (from 12.5% to 7.5%) and platinum & palladium (from 12.5% to 10%). It has also introduced mandatory hallmarking of jewellery. Indian households are estimated to own 24,000 million tonnes gold. In order to tap this asset base, the government has revamped the Gold Monetisation Scheme, allowing participation by more public sector banks, a lower minimum deposit of 10 grams and extension of the scheme for jewellers. Recently, the Reserve Bank of India (RBI) announced the eighth tranche of the sovereign gold bond scheme (government securities denominated in grams of gold) for FY2022. These bonds offer a coupon of 2.5%, in addition to returns offered by rising gold prices.

“The dynamic market and uncertainty caused by Covid-19 have renewed interest in gold jewellery as a long-term investment. It has also emerged as the safest and most lucrative long-term asset,” says Ramesh Kalyanaraman, executive director, Kalyan Jewellers.

A recent WGC analysis of Indian gold demand between 1990 and 2020 has found that for every 1% rise in inflation, gold demand in India shoots up by 2.6%. For every 1% rise in gross national per capita income, gold demand zooms 0.9%. Similarly, for each 1% fall in gold price in a year, demand rises 1.2%, and for each 1% increase in rupee price of the yellow metal, demand dips by 0.4%. The report says increase in import duties since 2012 has been depressing gold demand by 1.2% per year. “While cultural affinity, tradition and festive gifting play a significant role in driving gold demand, these qualitative factors are complemented by quantitative aspects such as household incomes, gold prices and inflation, a key issue facing investors in India,” says Somasundaram P.R., regional CEO, India, WGC.

Silver Also Shines

Silver is also seeing robust demand. The metal has wide industrial applications in solar wafers, switches, relays, batteries, water purification systems, paints, computer motherboards, etc. That is why its demand is determined by industrial activity rather than people’s love for ornaments.

What makes the silver outlook promising is that while global availability is about 600 million ounces a year, industry demand is about 870 million ounces a year. To top it all, mining costs are the same as for gold and increasing output is tough. Silver prices have risen from less than ₹40,000 per kg in India before Covid-19 to over ₹60,000 per kg. Resurgence of industrial activities globally has helped too. In 2020, silver demand was over 1,000 MT, 40% less than the previous year.

The silver jewellery segment is not far behind. Exports were $1.7 billion in FY20 compared with $832 million in FY19. This was mainly due to gems and jewellery exporters turning to silver and lab diamonds after Covid-19 hit gems and jewellery sales.

Another push to silver demand has come from a recent Securities and Exchange Board of India move to have a mechanism for silver ETFs. A number of fund houses are getting ready to launch silver ETF schemes.

Diamonds Forever

Like gold and silver, diamond and other gems also becoming attractive long-term investment options. “Natural diamonds have both emotional and financial value,” says Sachin Jain, managing director, De Beers India. He says the industry was unsure and somewhat pessimistic at the start of the pandemic. However, as months passed, there was a change in consumer behaviour. “Our research showed that consumers were moving towards things that matter and hold value and meaning in their lives,” he says. Moreover, savings due to smaller gatherings meant people bought more jewellery during weddings.

The trend has been visible across the globe. In first half of FY2022, India exported gems & jewellery worth $18.98 billion, compared with $8.01 billion in same period of FY2021. This marked a big change from 2020 when global demand for diamond jewellery fell 14% to $68 billion. In 2020, rough diamond volumes produced by miners dipped 18% to 114 million carats.

A Bright Future

In 2020, polished diamond sales were $2 billion, down from $3 billion in 2019. Diamond jewellery sales fell 28% to $4 billion, though there was a resurgence of demand in run-up to the Diwali season, says a recent De Beers Diamond Insight report. Cut & polished diamond exports from India, the hub of the global diamond processing industry, grew 34.1% to ₹62,390.23 crore in April-July 2021 compared to ₹46,515.91 crore in April-July 2019.

“We have seen tremendous growth in consumption of natural diamond jewellery, and we are bullish that 2021 will be the best year for the industry,” says Sachin Jain. Kalyan’s Ramesh Kalyanaraman says demand for jewellery will continue to rise and 2022 will bring great tidings for India’s jewellery industry.