The steep decline in gold's price has hit a wide spectrum of investors with gold-linked accumulating schemes.
Investors have been seen rushing to sell their gold holdings and subscribers to jewellers' gold accumulating schemes have started reducing their monthly commitments. Several big jewellers and jewellery companies had launched these schemes over recent years. Investors had to put in a small amount every month and on expiry, would get certain monthly instalments back as a bonus; in return, one could buy from that jeweller.
This was a good attraction when gold prices were rising. However, now that investors have seen a steep fall in gold prices and it is no more looking as a safe asset, there appears a rush to discontinue the instalments.
Jewellers are putting a brave face. "It is a temporary phenomenon," said Mehul Choksi, chairman and managing director of Gitanjali Group, one of India's largest jewellery manufacturers and retailers. It had recently launched a Swarna Mangal' gold price protection scheme, with star actor Salman Khan as brand ambassador.
"It is too early to assess the impact of the gold price fall on investment schemes, as consumers bet for the long term by subscribing to such plans. Also, hardly any consumers under such schemes are wary of a fall in gold price. We have not noticed any collapse in subscription," said Sandeep Kulhalli, vice-president, retail & marketing, Tanishq.
"Such schemes work only at the time prices move upwards. They cannot work in a condition where the gold price falls steeply in a couple of days," said Rahul Rege, head, retail business, at Emkay Global. To run such schemes and offer a bonus to customers, jewellers need to take larger exposure. However, when gold prices fall, they are squeezed from both sides, he says. On the one hand, their exposure value will erode in proportion to the price fall; the committed bonus outgo will be another pain they need to bear.
The price of gold declined by a steep 11.9 per cent in the past week, from Rs 29,390 per 10g to Rs 25,900 per 10g today. Today, standard gold fell 2.5 per cent, from Rs 26,550 per 10g at Zaveri Bazaar here. In London, the price has declined 16 per cent since the beginning of this year and 33 per cent from the peak of $1,920 an oz to trade currently at $1,388 an oz. UBS, the global advisory firm, has a further decline to $1,250 an oz.
"Indian consumers' aspiration towards gold continues unabated. The price decline is, in fact, helping consumers to buy during the ongoing wedding season and prices will recover in the near future," said Choksi.
Meanwhile, the bullish sentiment has turned suddenly bearish in e-series contracts. The National Spot Exchange of India runs e-series contracts under which investors can buy exchange-traded gold in demateralised form; this contract would generate good volume. Till last week, in this contract there used to be four buyers against three sellers, with 50-100 kg of delivery to buyers. Now, "sellers are looking for an exit opportunity. Consequently, the ratio of buyers and sellers has turned 1:4 (one buyer and four sellers) with 550 kg of gold being delivered in the last three days alone," said Anjani Sinha, managing director of NSEL. Investors feel gold prices will fall further and, hence, seem to be looking for exit opportunities.