India's Love Affair with Gold - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 10 December 2011
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Gold has an extremely significant role in Indian society. For a long time, it has been viewed as a safe store of value. Many households own gold that has been passed down over generations; an indication of just how much value we place on it. Most weddings involve transfers of gold between different parties. More recently, gold has become an important investment product for numerous individuals.

So just how much gold do we buy and keep as a store of value? More importantly, does it matter? From an economic perspective, does buying and owning a lot of gold make us better off or does it make us worse off? First, let's look at a few statistics just to get an idea of how much gold we actually have.

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India's GDP is equal to 2.6% of the world's GDP, though we own 11% of the world's gold stock. The total value of the gold present in India is just under USD 1 trillion, or Rs. 50,00,000 crores. The average person owns gold equal to approximately half of their annual income. India is the largest consumer of gold in the world.

Most of these statistics are probably not too surprising, given what we know about the gold culture in India. Many households have likely experienced an increase in wealth over the last ten years as a result of gold prices increasing 500% over this period. However, most of the time, we do not sell our gold, so this hasn't translated into greater buying power.

While owning gold has been a good idea for many individuals looking for a solid long-term store of value, being the largest consumer of gold does have its downside. One of the main reasons is that the vast majority of our goldis imported from abroad.

Over the last three years, our current account deficit has doubled, from 1.3% to 2.6% of GDP. Around one-third of the increase is due to gold imports. In fact, gold represents India's third largest imported good, after oil and capital goods. Imports for gold are approximately 10% of our total import bill.

Given the fact that the rupee has weakened considerably in the last month, and foreign inflows have reduced due to the global crisis, the current account deficit is becoming a significant problem. The more it widens, the lower the GDP growth rate will be, and the worse off the economy will be.

A good way to look at this is to imagine that gold is a currency. When we save money, we have the option of keeping our wealth in rupees (e.g. in the stock market or in a fixed deposit) or in gold. Of course, from an individual perspective, it is wise to be diversified and hold certain amounts of both. Unfortunately, the more gold we decide to hold, the more rupees we sell, and cash is effectively taken out of the economy.

So from an individual perspective, it can be quite sensible to hold gold as a store of value. However, from the point of view of the economy, the more gold we hold, the less gets invested in companies, banks, etc. India's love affair with gold is probably not going to change anytime soon, but we can become more aware of the economic impact of this.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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8 Responses to "India's Love Affair with Gold"

SPSINGH

Dec 12, 2011

What ever is said may be right about gold, but ,we do not have safe avenue for investment which can give inflation adjusted positive return on long term basis without attracting undue attention except gold.
Think over and provide some solution for the same.

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VIJI

Dec 12, 2011

GOOD Mr.ASAD ,
ALSO IT'S AN ILLIQUID ASSET -ANY TIME IT 'LL GO BUST/BURST ,WHEN US & EUROPE (SPECULATING/NOT TO MAKE IT AS INTERNATIONAL RESERVE CURRENCY/ HIGHETS RESERVES/NOW DEBTS SUPPRESS etc.,) TURN THE TABLE UPSIDE DOWN .

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Yatin Parikh

Dec 12, 2011

Well said Asad. i know of families who will spend and buy gold and hoard it for emergencies, but who live in rented houses. why not invest in your own home instead ?
Rarely will anyone sell their gold. if it is jewellery, it will be sold to buy new jewellery !
You should look at another intriguing fact - why are the severely affected Eurozone countries not selling any of their gold to reduce their huge debts ??

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Ramanand

Dec 11, 2011

There are 2 ways of looking at gold: One as money and the second as a commodity. The second viewpoint has become more widespread since Nixon shut the gold window in 1971.
Anyway, if there is a concern that money spent on gold is somehow 'not available to companies and banks, etc.', then one can always take the second viewpoint that gold is a commodity. Banks today are in the forefront of supplying imported gold to Indians. Spending on gold is giving them profits, they are not complaining. Similarly, several NBFCs are all too happy to lend against gold. Their business goes up if anybody wants to invest in gold by borrowing.
Considering all this, I fail to see how Indians buying gold is negative for the Indian economy. Economy is not only driven by savings, but also by spending. Any modern economist who thinks buying gold is somehow unproductive, should simply rationalize that gold is somehow an 'essential' commodity, and people who need it will spend their money and buy it. Please remember that spending on movies, televisions, and entertainment of any sort is equally unproductive. I doubt any modern economist will lament if a large portion of our GDP comes due to the entertainment industry!

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Daniel

Dec 11, 2011

There is prudency in an individual perspective and not in your economy view. 35% of assets should be gold and only 10% in stocks

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Sadanand Joshi

Dec 11, 2011

You are absolutely hit on the nail.. our problem is not that we don't have the money but its not in economy.. we have got lot of dead money ..every Indian should think about it... recently one of our temple found reserves of huge gold .. which is absolutely dead money (though it may have appreciated in value).. such wealth should be used for infra development and growth of the country .. we should find out way to do this.. the day we decide take such decision we won't be far away from becoming world's Super Power

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Om Prakash Sharma

Dec 11, 2011

A very thoughtful analysis. It looks as if contra view but it is only the correct view.

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GIRISH SHAH

Dec 11, 2011

TRY TO LEARN FROM PEOPLE RATHER THAN CRITISIZING (INDIANS ARE DOING A MISTAKE ------YOU KNOW THEY SHOULD INVEST IN THIS ANDD THIS ---------)


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