Physical Gold Investment Market in India

1. Physical Gold Investment Market in India

2. About Us The World Gold Council (WGC), a commercially-driven but not-for-profit marketing organization, is funded by the world’s leading gold mining companies. A global advocate for gold, the WGC aims to promote the demand for gold in all its forms through marketing activities in major international markets. For further information visit www.gold.org

3. Globally the total investment in Gold (physical & non-physical) in Jan-Mar ’08 remained stagnant at approx. 146 tonnes • Globally ETFs grew by almost 100% (reflecting the confidence of investors in gold as the best performing asset class during turbulent economic times) • Physical markets (mainly India, Turkey, Saudi) declined by 30-40 % • In India the Physical Gold Investment was down by 50% (at 31 tonnes) in Jan-Mar ’08 period • Indians continue to invest mainly in its physical form • Indians are also one of the most price-sensitive gold consumers • This tends to be a limiting factor in times of extreme price volatility since consumers treat physical investment products on the similar lines as jewellery purchases (adopting a wait and watch policy and refrain from new investments till such time the prices stabilize) Gold Investment Market - Update

4. Price vs. India Tonnage Impact Steady Price Increase = Increase in Demand Sudden Price Increase = Drop in Jewellery Demand Price Increase + Volatility = Sharp Drop in all Demand High Volatility

5. One could view the current situation is a temporary phenomenon; a fallout of the current economy downturn • High crude prices • Inflationary pressures • Weakening of the Rupee • From a long term perspective: • Also, India’s robust growth story continues to offer many investment avenues to consumers; thereby making it one of the world's fastest growing wealth creators… which will impact gold investment practices in India as well • The Physical Gold Investment market has emerged as a distinctly separate category in India since the past 4 years and is growing • The annual Per Capita Consumption of gold in India is half of that in US and well below the Middle Eastern Countries; Hence there remains plenty of scope for further growth! Gold Investment Market – Way Forward

6. Source – SEBI, NCER 2005 report • Indians are skewed towards PHYSICAL GOLD: • It is culturally engrained into our lives • It provides an effective anonymous means of storing wealth • The regulatory authority – Reserve Bank of India (RBI) does not allow Banks to offer paper products to consumers such as gold certificates, gold accumulation plans etc. • Investment preferences of majority of Indians (living in rural areas) remain traditional asset classes including gold (but quality products are not yet available to them) Understanding the Investment Practices in India • A recent study, demonstrates that the confidence of an average Indian investor is still skewed towards Government owned financial institutions • Since early 2007, 5 ETF like demat products have been launched in India although the off take has so far been slow. The combined holding of the four listed asset management companies is less than 5 tonnes.

7. RURAL URBAN HNIs Understanding the Relevant Consumer Segments Largely untapped by the Organized Sector Tapped by the Banking Sector & recently by non-Banking Private Sector UPPER MIDDLE CLASS MIDDLE & LOWER MIDDLE-CLASS BOTTOM OF THE PYRAMID Recently being explored by Micro-Finance agencies

8. Future Potential Identified by WGC as the Next Big Growth Areas in India Seed long term consumption by tapping the following: • Enhance “Accessibility” to Middle & Lower-Middle Class Consumers in both Urban & Rural markets • Make gold more “Affordable” to the “Bottom of the Pyramid” consumers • Aggressively target the “HNI” segment

9. Enhance “Accessibility” to the Masses Reinforce physical gold (quality products) as the preferred savings instrument of the middle & lower-middle class consumers in both urban and rural India • 40 mio “middle class” households expected to rise to 65 million in 2010. This segment would account for almost 60% of India’s population, one of the highest in the world • Aspirations’ of the middle-class segment is rising - Indians are earning more & spending more: Per Capita Income growing at 7% pa; McKinsey Global Institute predicts that the average Indian's income will triple by 2025 Enhanced Accessibility via Mass Channels: • Large Public Sector Banks having a sizeable reach in rural/ semi-urban markets • Other Government Institutions having a wide network that could reach the masses • More Private Segment Players entering this segment at a National/ Regional level • Unconventional Channels such as Money Exchanges, Organized Retail Outlets – Malls/ Department Stores etc. Amongst this segment, it is important to tap the “working women” with special EMI schemes and Gold Accumulation Plans by private sector organizations

10. Tapping the “Bottom of Pyramid (BOP)” Consumers “If we stop thinking of poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up” Mr. C. K. Prahlad Harvey C. Fruehauf Professor of Business Administration, Corporate Strategy & International Business University of Michigan Business School, USA • Over 4 billion people globally live at the BOP and earn < US$ 2 per day • India is home to more than 400 million of such consumers • Studies show that this segment represents a “latent market” for goods and services

11. Tapping the “Bottom of Pyramid” Consumers Nature of the BOP Markets: • There is money at the BOP • Access to BOP Markets • Trust is Prerequisite WITH MORE THAN 400 MILLION BOP CONSUMERS, ALL OF THIS WILL BE APPLICABLE FOR THE GOLD INDUSTRY IN INDIA AS WELL The BOP Market Development Imperatives: • Affordability: • The key is affordability without sacrificing quality. BOP markets should be based on small unit packages, low margins per unit, high volume and high return on capital employed. • Access: • Most BOP consumers work full day before they can have enough cash to purchase goods or services. Hence distribution patterns must take into account their lifestyle and work patterns • Availability • Often the decision to buy for BOP consumers are based on the cash they have at hand at a given point of time. Hence they must be tapped immediately before they spend it on something else, thereby making distribution timing a critical factor

12. Tapping the “Bottom of Pyramid” Consumers Hence in order to tap the next big growth area for the Physical Gold Investment Market (medallions and bars), the industry needs to make quality gold products affordable and accessible to the “Bottom of Pyramid” consumers via Micro-Finance agencies

13. Tapping the “HNI” Segment Background: • In India the High Net Income (HNI) individual is defined someone holding more that Rs 4.5 crores (US$ 1 mio) in financial assets • India ranks second only to South Korea among the global top 10 fastest growing HNI populations (2006 World Wealth Report by Merrill Lynch & Cap Gemini) • The HNI financial wealth ended at a staggering US$ 290 bio; The total HNI population stood at about 83,000 individuals at year-end 2005 • Understanding the Indian HNI Segment Requirements: • There is a huge demand for wider basket of local as well as global products • They are now open to diverse product solutions such as: • Structured products: stocks, bonds & more recently forex, commodities & hedge funds • Real estate investments: With the ongoing real estate boom across India, this segment has now gone beyond purchase of a second home. They are looking at a direct investment either into real estate mutual funds (currently not traded through any of the domestic exchanges) or into projects under construction/ through leased properties e.g. retail outlets, multiplexes, office blocks, hotel properties, warehouses etc. • Art & antiques: Again a new form of investment with options ranging from directly purchasing art from known master or budding artists or through an Art Fund

14. Tapping the “HNI” Segment Gold • Currently there are only 2 options available to them: • Physical form – Bars & Medallions but they are less attractive to this segment (higher volumes & security/ insurance issues especially in the case of large holdings) • Non-Physical - Demat products available on the exchange. However, they may not be as competitive in their price structure as compared to our global ETFs. • At the same time it is interesting to note that the premium on these demat products (management fee of 100 basis points with custodial charges at 60 basis points) is more attractive than the premium charged on the physical products available in the Indian market (ranges from 2-3% to as high as 12-15%) Need of the Hour • The HNI segment needs to be formally tapped by the Industry (Asset Management Agencies/ Private Institutions) especially in regards to gold related investments

15. RURAL URBAN HNIs Future Potential Waiting to be Tapped Largely untapped by the Organized Sector Tapped by the Banking Sector & recently by non-Banking Private Sector UPPER MIDDLE CLASS MIDDLE & LOWER MIDDLE-CLASS BOTTOM OF THE PYRAMID Recently being explored by Micro-Finance agencies

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