Indians and Gold Investments

Indians and Gold Investments

Taking the Glitter out of Gold

Large gold imports can throw off a country’s current account balance – the difference between what a country earns and what it spends on foreign trade. Widespread investments in physical gold also mean that large pots of wealth sit idle, instead of being put to work in the broader economy. And in countries where gold is a popular investment, those financial institutions which carry large gold deposits, lend cash against gold or offer interest-bearing gold deposit accounts, can pose a risk to the financial system if commodity prices suddenly shift.

Governments in India, the largest gold importer in the world, and Vietnam, a  country which imported 95% of its domestic gold consumption in 2011, have taken steps in the past year to discourage savers from hoarding gold.  The Indian government doubled import duties on gold bullion to 4 percent in March and with current account deficits at record highs, recently announced another hike to 6 percent.

Indian gold imports already appear to have slowed. After several years of acceleration, the Reserve Bank of India reported last month that gold imports between April and October 2012 dropped to 398 tons from 589 tons during the same period in 2011. In a recent note, Credit Suisse analysts predicted that net imports were on track to drop to no more than 800 tons for the whole of last year from 2011’s approximately 970 tons.

Gold is especially popular among lower-income residents in India and has deep cultural significance, especially as a prized component of wedding celebrations. This year contains more days considered auspicious for a wedding than 2012 and national elections loom in 2014

A Sound Investment

A pitch against gold is also hard to make for other reasons. Gold investments in rupees have performed well over the past 10 years, with the value of the yellow metal rising by 477 percent – more than the 425 percent rise in India’s S&P Nifty 50 stock index over the same period.  Low interest rates and easy access make other investments relatively unattractive

Many Indians use gold to hedge investments against inflation. But a working group convened by India’s central bank recently advocated a range of alternative investment products which could be used by the public as an alternative to gold for inflation hedging. Gold-linked savings accounts, bonds and certificates that entitle a holder to physical gold could help reduce demand and quickly move more liquid assets into the country’s banking system, the group suggested.