Photo: Mint/Graphic: Santosh Sharma/Mint
Photo: Mint/Graphic: Santosh Sharma/Mint

Demand for gold remains high in domestic market despite sharp price hike this year

Avoid investing in physical gold, especially jewellery, as you can lose 30-40% of its value on various charges

Indians are traditionally biased towards physical assets such as gold and real estate. When it comes to the yellow metal, Indians buy it for consumption in the form of jewellery as well as for investment. India is the second largest consumer of gold after China and, according to the World Gold Council, imports an average of 700 to 900 tonnes of gold each year.

However, the increase in gold prices hit demand in the first half of the year, but buyers came back during the festive season in the second half of 2018. “Domestic demand during the first half of the year was impacted severely on account of high prices and weak consumer sentiments. Demand improved during the September quarter on a low base," said Rahul Prithiani, director, CRISIL Research. Typically, compared to first half of the year, the second half witnesses higher demand owing to festive and marriage seasons, when most Indian buy gold.

Gold prices increased significantly during the year in the domestic market, reaching nearly a 6-year high on 10 October ( 31,909 per 10 grams) compared to the international market. As on 24 December 2018, gold was trading at 31,254 per 10 grams.

“Global gold prices rose by a mere 1% in 2018 on account of increase in United States (US) Federal (Fed) Reserve rate and dollar strengthening. International gold prices have a strong inverse relationship to US Fed rate and rise in USD index (US dollar movement against a basket of six other currencies)," said Prithiani.

Depreciating rupee was an important factor that impacted gold prices in India. “Domestic gold prices, in general, move in line with international gold prices, as over 95% of demand is met through imports. However, despite international gold prices rising marginally this year, domestic prices saw a surge of 5.4% on account of rupee depreciation," said Prithiani.

Apart from buying jewellery for consumption, Indians also invest in gold for long-term financial goals such as children’s marriage. But is gold a good investment?

“Gold as an asset class is not likely to give substantial real returns," said Rohit Shah, founder and chief executive officer, GettingYouRich, a financial planning firm.

In the last five years, returns from gold have been almost negligible as prices remained stagnant during the period. As on 24 December 2013, gold was at about 29,500 per 10 grams compared to about 31,250 on 24 December 2018, an annual return of just above 1%.

But you can always consider the metal for diversification. “Gold allocation is to invest with the perspective of conserving wealth and having some diversification away from financial assets," said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors.

Gold is a good hedge against inflation but does not provide dividend or interest. The government’s Sovereign Gold Bond Scheme, however, gives 2.5% interest per annum on the investment amount. “It makes sense to invest reasonably in gold. It’s an asset that protects during bad times, is a global currency and can be converted in cash very quickly. We recommend 5 to 10% of one’s assets in gold preferably in a digital way," said Shah.

You can choose to invest in sovereign gold bonds and gold exchange-traded funds (ETFs). Avoid investing in physical gold, especially jewellery, as you stand to lose 30-40% of its value after paying making and transaction charges. Besides, storing physical gold securely can be a matter of concern.

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