Photo: Reuters
Photo: Reuters

Indians’ gold love hits rough patch amid slowdown

Year to date, the demand for gold in the form of jewellery has been 395 tonnes, and in the form of bars and coins 100 tonnes.

The World Gold Council (WGC) report for the third quarter of 2019 shows weakness in gold demand in India. The economic slowdown and the high prices of gold were cited as the reasons for this. Mint takes a look at the Indian connection with gold.

How do Indians buy gold?

The traditional way to buy gold has been via jewellery and, to some extent, gold bars and coins. Other favoured ways include unregulated but convenient options such as periodic deposits with a jeweller in the form of EMIs, which can be used to buy gold in the future. In recent times, financialization of gold purchases has seen some momentum with products such as sovereign gold bonds issued by RBI, gold exchange traded funds of mutual funds and digital gold seeing traction with investors. While holding gold traditionally was seen as an investment, financialization of the asset class will make it work more efficiently.

What is gold’s role in an investor’s portfolio?

Gold acts as a diversifier in an investment portfolio. It does well when other assets are doing poorly, and vice versa. The yellow metal also flourishes as a safe haven when there are economic and geo-political uncertainties. In societies such as China’s and India’s, it is regarded as a marker of wealth and social status, besides carrying religious endorsement as an essential element in festivals and rituals. These motives drive the purchase of gold. As an investment, people use it for the stability it brings to their portfolio during times when other investment returns are going through tough times.

Graphic: Sarvesh Kumar Sharma/Mint
Graphic: Sarvesh Kumar Sharma/Mint


Is physical gold a good investment option?

Physical gold suffers from the risk of under-caratage since the Bureau of Indian Standards’ hallmarking of the precious metal to certify its purity is voluntary. Physical gold also imposes additional costs of storage. Besides, making charges bleed away as much as 15% of the price paid. So, it is a poor investment option.

What has been the trend in gold demand?

Year to date, the demand for gold in the form of jewellery has been 395 tonnes, and in the form of bars and coins 100 tonnes. The year-on year fall in demand has been 32% in the case of jewellery, and 35% in case of bars and coins. World Gold Council data shows that demand for jewellery has fallen 40% from Q2 2019 to Q3 2019, as compared to flat demand in the corresponding period of 2018, and a 16% fall in demand in 2017. Gold bars and coins, too, saw a similar declining trend with demand falling to the lowest since 2009.

Why has gold demand dipped in India?

The WGC report says weak economic sentiment is eroding consumer confidence, thereby leading to fall in demand. Besides, the domestic price of gold reached an all-time high of 39,011 per 10g in September’s first week. Gold prices have since seen a correction with prices falling by 2,200/10g. A 2.5% increase in the custom duty to 12.5% hit consumer demand further. As an investment option, gold faced competition from the equity market, as benchmark indices touched all-time highs during this period.

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