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Gold's Allure As An Investment In Asia

29th January 2013 Shahnaz Mahmud

Gold as an investment is critical to Asia and it is continually evolving too...

"The Vedas tell us: 'That which is made of Gold always remains Gold.' This is why in India, owning and wearing gold jewellery is not just a tradition, but gold reminds us of the undying nature of the Divine Consciousness which resides in each of us."
 
This quote can be found on the N. Gopaldas site, an Indian jeweler that's been in existence since 1929. The Vedas are large body of texts, originating from Ancient India; from Sanskrit literature to Hinduism.  The N. Gopaldas site goes on to say: "Traditional South Indian gold jewellery from N. Gopaldas Jewellers brings all that is auspicious into your life", leading the site-goer to view bangles, rings, necklaces, earrings, pendants, chains, bracelets and anklets.
 
As market-speak as it sounds, gold has been tied to tradition and culture in the region for centuries; it's the sense that it's as old as salt.
 
To the West, it must seem very much for adornment. But, gold as an investment is critical to Asia-and it's ever-evolving, according to an Argyle Executive Forum investment panel. Executives from the World Gold Council shared their views.
 
"Our love for gold [In India] is centuries old," says Mumbai-based Amresh Acharya, director for investments at the WGC. "We have always had a fetish for it. When we were born we were told by our grandfather, grandmother, mother, to buy gold. When a daughter is born in an Indian family, there are times when the family begins to give gold right from the time of birth. It's cumulative so the gold can be given to her on her wedding day."
 
Acharya emphasizes that most of the gold that is bought in India is bought as an investment; that adornment from jewellery is only one of the functions it performs. Its investment value is key to Indians buying gold, whatever form they buy it in, whether it be jewellery, gold bars or coins. He highlights the uniqueness factor, in that 70% of the gold that is bought in India is actually bought with relation to a particular occasion, particularly with respect to marriage.
 
"The gold that we give to our daughters on their wedding signifies the wealth of the lady," he says. "So the gold that is given to her in marriage is actually given to her as her wealth that she takes into her marriage and the new family that she is entering into. So it's investment and expenditure on the marriage."
 
And of course, having a high inflationary environment in India coupled with the fact that the currency does tend to be very volatile. supports gold as an investment because people realize that it's a great hedge against both these factors, he also emphasizes.
 
Roger Liu, director of Far East investments for the WGC in Hong Kong, says China perceives gold similarly. "The Chinese have always been seeing gold as money," he says.
 
It is viewed more valuable as an investment compared to jewellery, particularly as a hedge against uncertainty, but also as something tied to tradition in passing it down from generation to generation. Most people, he says, own 24 carat gold because of its investment value.
 
But, Liu also sees a shift occurring. Traditionally, young kids would view gold as something that their grandparents or their mother would keep in a cage; something taken out and worn for a special occasion.  Now, with the growth of wealth in the family, saving is becoming more the norm. While the brunt of savings comes from deposits, he points out that in China, you can actually get a negative return on your deposit rate. So for those investors seeking a more attractive return, people would buy gold bars and gold savings accounts. He says that in the next two years, there will exist the possibility of gold as a formal investment in the country, where investors can invest in gold security products.
 
Interestingly, Japan is also seeing some movement in this regard. As Takahiro Morita, director of Japan at WGC says, the country has been experiencing a weak economy for some time. Its ills will continue to see deflation and disposable income coming down. The corporate outlook
remains bleak. Morita describes a culture that is "quite protective" not only for public pension plans, for corporates as well. 
 
So, as the concern for the future of financial security grows, gold is becoming more attractive.
 
Morita says in the past 18 months in particular, there has been a great deal of pension funds investing in gold. He pointed to a recent Nikkei report that cited over 200 pension funds investing in gold. Eighteen months ago, that number was zero, he says. "We are seeing a new generation start to value gold investment again," says Morita.
 
Morita further explains that institutional investors, feeling dazed by the financial crisis, began to re-evaluate their portfolios. It took about two years before much action was taken, but as they continued to see the performance of traditional assets in Japan perform poorly, having a diversified portfolio became more attractive. He also points out that it wasn't until 18 months ago that information became available on the gold market, "so now people actually have sufficient information to make a judgement on gold," he says.
 
Throughout Asia, it is the rise of the middle class that is contributing to the demand for gold. As a part of this one of the "miracles" of Asia in the last few years is the dramatic increase in the foreign exchange reserve and how the central banks have been a source of demand for gold.
 
As Liu says, there is a great need for the Chinese government to pump up their gold reserve so the benchmark will industrialize - such as France, Germany, and others. China, he says, is clearly eager to increase "and the trend is to try to increase the gold reserve as much as possible."
 
And Acharya points to an incident in India in 1991, prior to India liberalizing its economy, where its central bank borrowed money from the overseas markets. "The net result of that is today, India is one of the 10 largest holders of gold in the emerging markets," he says. Added to that, in 2010, it did one of the largest gold transactions-200 tonnes-which is one of the largest in gold's history. This is perhaps why Indians have so much faith in the Central Bank.
 
Acharya adds: "The philosophy is exactly the same as it is in China and the other emerging markets economies, which is that you have your foreign nation reserves growing dramatically within the last 10 years. But part of the reserves are the usual suspects, like the dollar and the euro. It is a good thing to keep it in these currencies, but you want to start rebalancing them in a slightly more neutral territory, like gold."
 
Access to gold is reaching an interesting turning point. In India, some of the ATM machines are actually offering it, similar to purchasing gold blocks at vending machines in Dubai.
 
Acharya emphasizes that dissimilarly to most of the world, jewellery is sold in half a million outlets across India, with most of them being single family-owned shops. Only about 10% of the outlets are a part of the jewellery chain.
 
But, he make clear that what people don't realize is that India doesn't just offer gold jewellery. He says that 30-40% of the demand in India is actually for gold bars and coins, which all of the jewellery outlets sell. And further to that, the country also has about 14 gold exchange traded funds running today. He says they have been the fastest growing segment of the asset management industry in India, across all asset classes.
 
Elsewhere, the WGC has played a key role in in ensuring that many banks sell gold coins over the counter. But, curiously, it is the post office that the WGC has truly altered into a robust entity selling gold. In India, says Acharya, the post office is very different from those in the Western world. "The post office is the largest of the central banks in the country," he says. "Today, there are 1100 post offices that sell gold, so the potential is huge."
 
Acharya says that at launch, in 2011, the banks and post offices sold about 24 tonnes of gold, marking great traction.
 
The WGC has also supported the research and development of a free market for gold exchange in China, which began in 2000. In 2004, the Shanghai Gold Exchange was created. In 2006, commercial banks launched gold savings plans and accounts. And in 2011, the WGC encouraged the idea of an accumulation plan, with an entry rate as low as US$30 to participate in the average purchase of gold on daily prices. "That created a
lot of ease for people to partake in gold investment plans," emphasizes Liu. 
 
"I think traditionally you can still buy jewellery, gold bars and gold coins and moreover, I think there is an investment account you can directly apply for with the Shanghai Gold Exchange through the bank. So there are many different ways to buy gold. I think China is becoming quite sophisticated, in terms of the accumulation of gold plans, one of the most sophisticated in the world. In the first year of launch we witnessed the creation of two million plans and three million in the second year, which amounts to five million accounts that were opened by the end of 2012."
 
So it's growing very rapidly. There is still tremendous room for growth with the development of gold as a part of an investment portfolio. But, Chinese investors are running out of choices for investments, so it's actually a very good time to consider gold."
 
 
Written by Shahnaz Mahmud - Managing Editor, Family Office Review
Republished with permission of Family Office Review
www.familyofficereview.com
 

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