Glittering prospects - The India Post initiative to sell gold coins during the festive season has got off to a fine start, thanks to the low unit prices and the hassle-free transactions.

For 32-year-old Anjan Ghosh, a small businessman from south Kolkata, standing in a queue at the general post office (GPO) in the city this Dhanteras was a golden moment. On that auspicious day of purchasing precious metals, Ghosh opted for the local post office rather than approaching the friendly neighbourhood  jeweler.

The decision by the Department of Posts to start selling gold coins during the festive season a few years ago has dramatically altered the traditional approach towards the postal department in the country and towards gold consumption for many middle-class customers across the country. The effort — which started by offering the service in around 100 post offices of Delhi, Maharashtra, Gujarat and Tamil Nadu circles in October 2008 — now covers more than 700 post offices, mostly in tier I and tier II cities, reaching out to nearly 50,000 small investors. In this effort, India Post is partnered by World Gold Council (WGC) and Anil Dhirubhai Ambani Group’s Reliance Money Infrastructure (RMIL). “Since inception in 2008, India Post has sold over 1.3 tones gold coins. This clearly demonstrates the success of the campaign,” says an ADAG spokesperson, a partner in the effort.

For customers like Ghosh, the postal department is the hallmark of reliability. The coins, with India Post logo on them, are produced by Switzerland-based Valcambi, a leading international gold refiner and bar manufacturer. They have the Assay certification — indicating the highest level of purity — and have an attractive silver cover, implying low risk of duplication. “If I go to a local jeweler, I can buy only 22 carat gold which is only 96 per cent pure. While here I have the advantage of getting 24 carat gold and that too with 99.9 per cent purity. For Dhanteras, the discount between 4 and 6 per cent that India Post offered was a bonus for people like us,” Ghosh says.

The long queue at the GPO in Kolkata, for instance, is just an indication of the potential of the business. In the last financial year alone, the exclusive counter for gold sales at this location knocked off 11kgs of gold coins. In less than a year and a half of operations, it has got more than 2,100 customers. The coins are of different denominations — 0.5 gram, 1 gram, 5 grams and 8 grams. The low unit prices make them an attractive option for small investors. (Click here for graph & tables)

The other draw is convenience. Compared to private banks — where the buyer of gold coins needs to have an account or fulfill requirements like opening a demat account, as in the case of gold exchange traded funds — buying gold at India Post is hassle-free.

India Post agrees the twin factors of ease and reliability will draw more buyers. “The whole process takes barely five to six minutes. Buyers should not have to worry about filling up forms; nor do they need a bank account. We don’t have any hidden costs and offer the endorsement of Valcambi, which makes the medals for FIFA world cups. The only requirement is that for sales above Rs 50,000 on a single bill, the buyer has to produce his/her pan card,” says Tapan Kumar Kundu, assistant deputy director at GPO in Kolkata. Each post office offering this facility gets time-to-time market updates notifying prices and discounts from the central server. Rising demand
The steady growth in the demand for gold and its zooming prices in the country is good news for India Post. India is the world’s largest consumer of bullion, accounting for about 32 per cent of the world jewellery and investment demand in 2010. According to the WGC gold demand trends report, the total gold demand in the country increased from 771 tonnes in 2007 to 823.2 tonnes in 2008; it fell somewhat in 2009 to stand at 642.4 tonnes, growing to 1,006.3 tonnes in 2010.

Meanwhile, the annual average price of gold also zoomed — from Rs 922.4 per gram in 2007 to Rs 1,214.3 in 2008, climbing to Rs 1,511.1 in 2009 to stand at Rs 1,799.2 in 2010. Kerala, Tamil Nadu, Andhra Pradesh and Karnataka account for 40 per cent of the country’s gold demand.

Despite the rising prices, the per capita consumption of gold shows no signs of letting up. The country’s per capita gold jewellery demand rose from 0.31 gram in 1992 to 0.61 gram in 2010. “In the last five years, prices of gold have grown 20 per cent every year, and recent trends show gold is the best performing asset in times of financial crisis. For instance, in the first six months of 2011, gold sales saw 22 per cent growth in terms of value compared to last year. During the period, 540 tonnes of gold was consumed compared to 443 tonnes during the same time in 2010,” says Keyur Shah, director, WGC, a non-profit association of the world’s leading gold mining companies, which is also the official marketing associate of India Post for gold coin sales. Two of its major programmes in the country include the association with India Post and gold sales through microfinance institutions.

“I believe that the price scenario is also looking positive for gold buyers, as all other asset classes are performing below expectations. Rising inflation has an impact on gold prices too. Through the India Post effort, we want to reach out to the rural middle class, who are looking for a safe investment option and this, I believe, is a reliable option for them,” adds Shah.

According to Shah, the global economic crisis has actually contributed to the demand for gold as a safe-haven asset. “There was a sharp rise in prices during the 2008 crisis too. With the world staring at yet another crisis, things look positive for gold investors. Demand is going to zoom in the coming days as even people from European countries are looking at gold as a safe haven, when all other asset classes are doing badly,” he adds. In the first year, the number of customers who used the option was around 10,000; it doubled the next year and has now reached nearly 50,000, according to the WGC.

With the prices hovering around Rs 27,000 to Rs 28,000 for 10 grams, things look bullish. A recent Centre for Monitoring the Indian Economy estimate says that the demand for gold will touch 1,200 tonnes by financial year 2020-21, from the current 1,000-tonnes level.

Road ahead

               Shah expects the number of post offices where the facility will be available to touch 2,000 in eight months and to 4,000 by 2013. “With the expansion of services to tier III and tier IV cities, we will keep revising targets every six months,” he adds.

According to the India Post annual report for 2010-11, there are 1.5 lakh post offices across the country, of which more than 1.4 lakh are in rural areas and another 16,000 or so in urban areas. The latest effort is seen as part of the Project Arrow launched by India Post in 2008, through which it wanted to improve the core operations.

On an average, 7,176 people are served by a post office, 5,682 in rural and 20,346 in urban areas. “Hence, once the plan expands to rural areas, the takers will gradually rise,” says Shah of WGC. As per an operation manual released by the Department of Posts, India Post gets a commission of 4 per cent on the sales price of gold coins, excluding the taxes. At the same time, the particular post offices arrange for the payment to RMIL after deducting its commission on a daily basis. The ADA Group firm provides a range of support services including procuring, logistics, information technology, marketing and driving sales. A well-run back end operation is already in place for this.

“We would continue our efforts to reach out to more towns and cities with innovative offerings for the masses. Availability in lower denominations is making it easier for more people to afford and own gold. We feel looking at gold as purely an investment option is picking up in India and going forward the potential is immense,” says the ADA Group representative.

As India Post looks at the rural market as a mine of opportunities, it turns out to be its biggest challenge too. “Obviously, there are challenges too, in terms of distribution of gold securely and also on connecting rural post offices online. The whole network should be connected in such a way that even the rural parts get regular price updates without any glitches,” Shah states.

Plus the demand and supply gap is also a concern for the yellow metal. On an average the total global demand of gold per year is about 3,500 tonnes. The largest chunk is met by mine production (59 per cent) and a smaller part from recycled (35 per cent), as per WGC (5-year average, Q4 2005-Q3, 2010). “With increasing demand and a dynamic market, the contribution of recycle gold is becoming less. So the demand supply gap is increasing,” he says.

WGC is leaving no stone unturned to give the effort a leg-up. On Diwali, it had a “believe it or not offer” that gave buyers 5 to 7 per cent discount and a special offer to win 100 coins of 5 grams on their purchases. “We are campaigning aggressively. The important thing is that there is no need to teach Indians the reason to buy gold. We just have to tell them where, when and how to buy it,” Shah says. The Department of Posts is also projecting gold coins as an interesting gift during special occasions such as marriages, birthdays and for corporate presents too.

But for people like Ghosh, it is the trust, purity and the price advantage which lead them to the nearest post office to own a piece of the pie.

Source : Business Standard, November 14, 2011