Gold is considered an essential commodity in India. Indians are the largest consumers of gold in the world. Gold has a significance in our culture as a symbol of wealth and social status.
In the past, people bought gold only for personal security. For years, people have seen their parents and grandparents invest in gold and convert gold to cash during a financial crisis, and so they believed gold storage in physical form to be a safe wealth haven even if all other investments take a downturn.
This is called the “exposure effect”-a phenomenon by which people tend to develop a preference for things that are most familiar to them.
Significance Of Gold In Indian Culture
So, most people invest in gold despite the availability of other investment forms and investment options. Also, the extensive use of gold in the form of jewelry for all important occasions such as festivities, weddings and social gatherings has sparked the need to hoard physical gold.
People of all income levels buy gold and value it as an ‘tangible asset’. When the economy is growing, gold rates decrease and people tend to stock for the future. On the other hand, when there is a personal financial crisis or a national move such as demonetization or price rise due to inflation etc., people liquidate gold for cash.
Gold has a religious significance in our culture as its used extensively in weddings. The demand for gold is seasonal and peaks only during the wedding season and festive season post September. Since gold is considered auspicious, people buy it in small to moderate quantities during this time despite the price rise, besides purchasing at lower rates at other times as well.
Pandemic Impact on Festive Demand
During the period from September to January, prices rise with rising demand amidst favourable conditions such as low inflation or low currency exchange rate fluctuations etc. This year, the recovery from the pandemic has had a bigger influence with economy on the road to stability.
With global mines just starting operations, little ease in travel restrictions across borders, and discretionary spending by most families, demand might not be as high as it was last year during this period. Hence, gold rates have started to actually decrease after hitting a high of 47,000 rupees per 10 grams in August 2020.
But, in a year from now, there will surely be a surge in domestic demand. With US economy on the path to recovery, the value of the dollar will increase and gold rates will further decline. An icing in the cake also happens to be lowered import duty of 7.5% on gold from the original 12.5% that can further impact gold prices, maybe even decrease and spur further demand for gold in the domestic market. This, coupled with income levels bouncing back to pre-COVID figures, people will stock up to mitigate the effects of a possible third wave.
It pays to invest less in the long run
People usually like to stock up gold to insure against financial crisis, an occurrence in several years. Since it’s easy to liquidate, it’s a viable back-up when all other investment forms yield negative returns.
Gold’s intrinsic value is unaffected by currency fluctuations due to inflation or exchange rate fluctuations. So, many find it secure to rely on gold when purchasing power becomes lower.
India’s rural class which can’t open bank accounts due to non-compliance with documentary formalities turn towards gold as a wealth-sustaining asset.
Also, there are standard electronic forms of investment like gold mutual funds, gold exchange traded funds, gold sovereign bonds etc. available for those who don’t wish to incur storage costs or labour of a thorough search for a trusted dealer like physical gold.
The gold traded on these portals is pure and prices are same pan-India unlike physical gold. Also, these portals control the flow of gold in the market by tracking the level of investment of each investor over a period of time. Though, these are still passive instruments of investment with much lesser returns than other investment forms.
Nevertheless, is all this effort to invest in gold worth it?
Impact of Gold Investing On Indian Economy
In India, the capacity for domestic production of gold is limited and most of the gold is imported. Gold forms a large share of the imports and is purchased in USD. This is one of the main reasons for India’s imports to exceed that of its exports, increasing the current account deficit increasing its foreign debt and lowering the value of the rupee. This largely destabilizes the country’s economy.
Policies to control and streamline gold investment have still not neared perfect implementation as the sector is largely unorganized. So, smuggling gold for export or domestic trade becomes easier, affecting prices.
Today, there are many investment vehicles that offer greater returns on investment in shorter time periods. In a thriving business economy where stock prices are at an all-time high, the returns on them over a decade is much higher than those realized from gold.
So, isn’t it time to invest less in gold?
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