Gold loses its glitter
Is India finally overcoming its gold bug? The World Gold Council has said that gold consumption this year is likely to be the lowest in eight years. The apex organization of the international bullion industry said the reason for the drop in demand could be the government’s war against illegal wealth, as well as a weak farm economy. There is no doubt that both are important explanatory factors. But there is another possible reason.
People buy gold as a hedge against high inflation—especially when real interest rates on financial assets are negative. India had nearly a decade of high inflation plus low real interest rates. The sharp decline in inflation over the past two years has made financial assets more attractive. Indians have shifted from physical to financial savings.
Love of the yellow metal imposed heavy costs on the Indian economy. High gold imports were one major reason the rupee came under pressure in 2013. Gold will still have a place in family portfolios, but hopefully dwarfed by financial assets.