India's Gold Bull Market
How to Profit from Skyrocketing Indian Gold Demand
Due to a sharp decrease in foreign exchange reserves following the Indo-China War in 1962, the government of India enacted the Gold Control Act.
This legislation made the private ownership of gold bullion illegal and created a huge black market for the yellow metal.
The Gold Control Act was repealed in 1992 after Indian government needed to sell 40 tonnes of the country's gold reserves to deal with more forex problems that had the country on the verge of default.
What happened next would change the gold market forever...
How India became the world's #1 gold consumer
Following the repeal of the Gold Control Act, the demand for gold in India began to sharply rise.
Indian gold demand immediately shot up 75% in the year after the Gold Control Act was terminated.
Overall, gold demand in India increased 174% from 260 tonnes in 1991 to 713 tonnes in 2008.
Top 5 Gold
Total gold demand in India fell 33% last year as global consumer spending dried up in the face of the worldwide financial recession.
Nevertheless, India is still the world's largest consumer of gold in terms of both tonnage and value.
Last year, India alone accounted for 20% of the global consumer demand for gold. This includes 24% of global demand for gold jewelry, which is has traditionally been one of India's strongest markets.
The Indian jewelry market is one of the largest in the world, with a market size of $13 billion. It is second only to the U.S. market of $40 billion.
Two Key Facts about
Gold jewelry forms around 80% of the Indian jewelry market. And during the first half of this year, the volume of growth increased 67% to 273 tonnes. In terms of value, gold jewelry demand increased 94% to $10 billion.
Indians traditionally invest in gold by buying gold jewelry. But other gold investments — including gold exchange-traded funds (ETFs) — are rapidly gaining in popularity as investors seek a safe haven and become more aware of the benefits of investing in gold in a non-material form as opposed to holding it as jewelry.
The eight gold ETFs that trade on the Bombay Stock Exchange have nearly doubled their bullion holdings in the past year to 11 tonnes.
The volume of gold for investment in India grew by 264% to 93 tonnes during the first half of 2010. In value terms, Indian gold investments accounted for over $3 billion — an increase of 300%.
Overall, total Indian gold demand in terms of tonnage nearly doubled, increasing 94% to 365 tonnes. Worth over $13 billion, the value of India's gold demand increased 122% during 1H 2010.
Indian gold demand in the second half of 2010 is likely to be at least 25% higher, even as gold prices hit a record high in India.
Analysts at China's National Spot Exchange recently published a report predicting gold imports to India may total 600 to 625 tonnes by the end of the year, despite strong gold prices:
This level of prices is already accepted, so during this period compared with last year, the demand will be higher. Last year was the first year when prices went up to this level. This year, prices have been around this level so people feel it might break the all-time high. Indians are not selling gold, they are buying.
— Anjani Sinha, CEO, National Spot Exchange Ltd.
The demand for gold in India is very healthy, but supplying Indians with gold has always been a problem.
That's because less than 4 tonnes of gold are produced in India every year. This output provides less than 1% of India's annual gold demand.
These low levels of production are no surprise. In the entire country of India, there are known to be only about 2 million ounces of gold resources.
That means that India's total gold resource could only supply current demand for about 33 days. So to solve the supply problem, India must import its gold.
And with demand in India continuing to rapidly rise, countries that export gold to India will find eager buyers willing to pay premium prices.
And here's where we might be able to squeeze out some healthy profits...
How to profit from skyrocketing Indian gold demand
Approximately 65% of gold Indian gold imports come from South Africa and Australia.
And after looking around, I found two gold companies that have significant gold production in both South Africa and Australia...
AngloGold Ashanti (NYSE: AU)
|Market Cap:||$15 billion|
Savuka Gold Mine, South Africa
AngloGold Ashanti is a leading global gold mining company with 21 operations on four continents.
Last year, AngloGold produced a total of 4.6 million ounces of gold, making it the world's third-largest producer of the precious yellow metal.
AngloGold Ashanti has a major presence in South Africa. The company operates seven gold mines in South Africa that are grouped into the West Wits and Vaal River regions.
AngloGold's South African Division produced 1.9 million ounces of gold in 2009 at total cash costs of $472 and ounce.
This year, the company is implementing a three-phase mine improvement strategy in order to boost South African gold production. Output in the first half of the year, however, has been seasonally weak. AngloGold's South African mines produced 831,000 ounces in the first six months of this year.
AngloGold currently has one operating gold mine in Western Australia. The Sunrise Dam Gold Mine produced 401,000 ounces of gold at a total cash cost of $646 an ounce last year.
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A second Australian project, the Tropicana Gold Mine, is in development and scheduled to open in 2013.
The Tropicana Gold Mine is also located in Western Australia and is jointly-owned by AngloGold Ashanti (70%) and Independence Group NL (30%) (ASX: IGO).
A pre-feasibility study carried out in 2007 by AngloGold Ashanti estimated the cost to build a mine at Tropicana will be $450-$500 million with annual production of about 400,000 ounces of gold. The project is estimated to have a mine life of 15 years with an overall production of 3.6 million ounces of gold.
Total gold production from South African and Australian assets:
2.3 million ounces in 2009
Percent of total company-wide production:
Gold Fields (NYSE: GFI)
|Market Cap:||$722 million|
Agnew Gold Mine, Australia
Gold Fields is one of the world’s largest unhedged producers of gold with operations focus on South America, Africa, and Australiasia.
The company produced 3.6 million ounces of gold from its nine producing mines last year, putting it in the fourth on the list of world's largest gold producer by volume.
Gold Fields has four large-scale gold mines in South Africa. They are the Driefontein, Kloof, Beatrix, and South Deep Mines.
Together Gold Fields' South African mines produced over 2.0 million ounces of gold last year and at average cash cost of $515 an ounce.
The company expects to increase South African gold production with the continued development of its South Deep project.
Gold Fields expects to increase production from South Deep from 300,000 ounces in 2010 to 800,000 ounces by 2014.
Gold Fields controls two operating gold mines in Western Australia. Together these mines produced 620,000 ounces of gold at an average cash cost of $536 an ounce last year.
This year, Gold Fields has been busy working on its Australian gold projects. The company is drilling to explore several new gold targets and upgrade resources to reserves. Gold Fields is also continuing to implement efficiencies and cost reductions and developing plans for new gold mines in Australia.
The company's efforts are paying off. Gold Fields was recently upgraded from Equal Weight to Overweight by Morgan Stanley.
Gold production from South African and Australian assets:
2.7 million ounces in 2009
Percent of total company-wide production:
India looks poised to remain the world’s foremost gold consumer with increasing demand for many years to come.
The country's demand will continue to be satisfied almost entirely from imports, as very little supply comes from domestic sources.
Investors may be able to leverage rapidly rising demand for gold in India by owning shares of mining companies that produce gold for export to the country.
Editor, Wealth Daily
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