Celebrations are about to begin ahead of the festive and marriage season. There is already a visible surge in shopping activity. Indian imports surged to 91 tonnes in September 2021 from merely 12 tonnes in the year-ago period.
In addition to that, gold buying is all set to get a further boost. The Reserve Bank of India is also selling a tranche of Sovereign Gold Bonds this week. These bonds are a part of the government borrowing programme. You get an additional 2.5% interest in addition to the return linked to the market price of gold.
When you buy gold, it is not an investment. It is your capital protection plan. There is a tendency in Indian households to hoard gold. Usually, all the gold is held in the form of jewellery, gold coins or bars. You need to evaluate the amount of gold you hoard. Yes, it is an excellent way to protect your wealth. But, is it a good investment? It is not if you do not manage it actively, according to the latest RBI monthly bulletin.
“While gold acts as a haven and provides diversification benefits to the portfolio, it does not offer any yield. Holding physical gold comes at a cost,” an analysis said while referring to the gold reserves held by central banks around the world. RBI holds over 770 tonnes of gold as part of reserves. The US Federal Reserve has over 8,000 tonnes of gold. With so much holding, RBI wishes to figure out ways to generate a better return.
At a household level, attitudes matter a lot. A new World Gold Council report on the demand for gold in India highlights exciting trends. Three main factors influenced the gold demand over the years. These include income, gold price level and government taxes. When people earn well, they tend to buy gold in India. For every one per cent increase in per capita income, gold demand rises 0.9%. For every 1% increase in gold prices, the demand for gold in India falls 0.4%, according to the WGC analysis.
The correlation of the demand for gold is greater with income than with gold prices. If prices of gold rise, under normal circumstances, the demand should fall. However, data reveals that when Indian households had more money, they bought more gold irrespective of the surge in the price. India’s annual gold demand rose to 1,000 tonnes per annum from around 700 tonnes even when gold prices soared by 137% between 2000-2010. India’s economy witnessed strong growth in the decade. In February 2006, the Mahatma Gandhi National Employment Guarantee Act or MNREGA was passed. It substantially lifted rural incomes. That perhaps explains the surge in the gold demand.
The other important thing highlighted by the study is the inflation factor. For every 1% rise in consumer price inflation, gold demand increases 2.6%. There is a tendency to find refuge in gold to tackle the impact of rising prices. The approach of the rural market towards growth is likely to continue unabated. With the government’s aim to double farmers’ income by 2022, there is a good chance that the demand for gold from rural households could remain robust.
What it means to you
The WGC research reveals that the affinity for gold is here to stay. This column has maintained that you must look at gold buying in the overall context of financial planning. It is a way to protect your wealth. However, you also need to beat inflation to grow your wealth consistently.
For increasing your wealth, you need to invest regularly for years in equity markets to create any meaningful wealth. A common-sense approach would be to look at a twenty-year trend. The BSE Sensex hovered around 3400 in 2001 and has crossed 61000 today. Gold prices were around Rs 4,500 per 10 gms then and are under Rs 50,000 today.
Your long-term investing plans need more than the glitter of gold. If you think you have enough gold in the form of jewellery, then you must look to buy gold in the form of sovereign gold bonds or exchange-traded funds. In the same breath, you can buy index funds instead of gold. It is a lot easier to do that through mobile applications and online platforms.
When people earn well, they tend to buy gold in India. For every 1% increase in per capita income, gold demand rises 0.9%. For every 1% increase in gold prices, the demand for gold in India falls 0.4%, say WGC analysis. The gold demand correlation is greater with income than with gold prices.
(The author is editor-in-chief at www.moneyminute.in)