India The definition of solid Investing

The story begins in the years immediately following India's independence in 1947. At that time, the new government decided to restrict the import, export and, for a time, even the ownership of silver and gold. Inasmuch as they drove the market underground, the laws succeeded. And, in the process, created premiums as high as 80% over world prices.

Smugglers took notice and looked toward the open market in nearby Dubai, where metal could easily be sourced. The preferred form of gold was the ten-tola (TT) bar, weighing 3.746 ounces, about the size of a hotel bar of soap. Twenty or so such bars could be slipped into the pockets of a specially made vest. And when the vest was full, the rounded corners of the bars allowed for more secretive methods of storage.

On a larger scale, hired boats sought to make a run for it with sturdy nets packed with bars draped over their sides. They were usually successful. If on occasion they were spotted by a shore patrol, the nets could be cut and the cargo allowed to settle to the bottom. Like the sea itself, 80% margins easily absorbed these rare losses.

Sunset on Smugglers' Cove

Traffickers were losing a little but making a lot. The government of India was simply losing. Something had to be done In I992, the Government set up the first plan to relax laws against gold imports. Upon re-entering the country, Non-Resident Indians (NRIs) could bring in five kilos of gold every six months. That year, gold imports took a jump, with legal imports accounting for roughly a third of the total.

The changes continued when, in June 1993, the scheme was expanded, with limited permission given to trade gold. In January 1997, the NRI allowance increased from five to 10 kilos. Then in October of, last year and as the gold price slipped lower and lower, the government decided not to wait and granted Open General Licenses to eight agencies.

Ian McCannah, of the Bank of Nova Scotia - ScotiaMocatta, one of the eight, sees this latest change as very positive.

"The granting of these licenses has definitely resulted in a more competitive market for gold in India. Banks with international bullion expertise can make their services directly available to Indian users for the first time." The cumulative result of all these changes has been a more open, thriving market. How healthy? Since 1981, Indian demand has roughly quadrupled every four to five-years. Last year was different. The increase was 55%.

Unlike market analysts, Indians perceived gold at the levels seen last autumn to be cheap - in rupee terms, gold had seen approximately a 50% decline in value between 1990 and 1998. An additional bonus was that October's liberalisation measures caused the gold premium over world prices to decline sharply, from roughly 17% last May, to just under 6% (partly offset toward year's end by a decline in the value of the rupee).

Sovereign Power on a Counterfeit Coin

An Indian purchasing gold can choose from a wide variety of gold bars, bracelets, earrings, bangles - almost anything and everything - except a national coin.

In part, this is because only producing nations mint gold coins. But, that said, there exists strong demand for unofficial coins and medals in many non-producing nations. In India, this demand has been met by other nations' mints. According to Gold Fields Mineral Service figures, India was the second-largest consumer in this category.

The Indian population's interest in coins was engendered by the Gold Control Act 1963, which exempted coins. Provided, that is, they were dated before 1947 when the gold coin of choice would have been the George VI sovereign. It took little time for ten-tola bars to be recast as fake sovereigns. They were all 21 carat, all dated 1946, and proved extremely popular. The idea took hold. Today, it is not unusual for a grandparent to make a gift of a medal or coin cast not with an image of" a foreign king, but with the figure of a god or goddess.

A Taste for Silver

A fair slice of India's silver usage is quite literally destined for consumption.

Flattened into extremely thin sheets of foil called vark, it makes an edible garnish for food, a comestible wrapper on sweets and is even threaded through chewing tobacco. It is part of the one-third of the country's industrial silver usage. The remaining two-thirds is jewellery, silverware and small gift items. In rural areas, especially in the north, buyers favour silver for jewellery. Though some pieces may weigh as little as 200 grams, most arc quite large. On a single wrist, it is not unusual for a woman to wear two kilos (over four pounds). Overall, she might wear five to seven kilos.

In fact, the larger pieces are hard to part with. Once put on, they are hammered solidly into place, becoming almost moulded to the body. "She would practically need a crowbar to take them off," according to Ashok Patni, a jeweller who divides his time between Leicester and Bombay.

Where for women silver is appreciated for its beauty, legend has it that farmers use it as a charm. Based on the belief that it will protect them against a bad monsoon, which would lead to a paltry harvest and area-wide economic downturn, farmers plant 1,000 - ounce silver bars in their fields. Should the first bad monsoon in a number of years occur, it may well be silver bars, and not crops, which are harvested.

Outlook on Demand

It would be difficult to top or even equal the extraordinary level of Indian gold consun1ption last year. Elm, prices, a sharp decrease in premiums and a one-off tax reduction if assets were declared in gold instead of foreign exchange combined for an extraordinary level of demand.

Thus far, India has largely escaped the economic turmoil in Asia, but the recently imposed eco no mic sanctions may prime a wild card. But whatever happens, most analysts believe Indian demand will remain significant, for the simple reason that precious metals are and will remain a firmly established tradition.

Timothy Green agrees. In his 1989 book, The World of Gold, he provides a unique perspective on the country:

"When I first came to India 25 years ago to investigate the gold trade, I recall an officer at the Reserve Bank of India lecturing me that banking was spreading fast into the rural areas, and before long the custom of keeping one's life savings in gold would wither. On the contrary, as India has grown more prosperous over the last decade, the habit seems, if anything, to have been consolidated."