All that Glitters is Gold

Posted in Finance Articles, Total Reads: 901 , Published on 03 February 2015

Well, a much debatable topic of the recent past. The burgeoning current account deficit (US$ 1.2 billion Q1FY14) since the UPA era has compelled the government of India to curb the imports by cutting down on either crude or gold imports; obviously the latter sounds more feasible as crude oil is an indispensable commodity. But it does not end there. For a country, so closely associated with the yellow metal, socially and culturally, it is almost impossible to change the consumer behavior overnight. The 20 billion dollar industry, employing some five lakh people can be restricted by government policies and measures. But that would only encourage smuggling and circulation of black money into the system because the demand still remains.

Gold prices have depicted a phenomenal increase in half a decade; from 8000 INR (in 2008) to 30000 INR (in 2012) per 10 grams, currently around 28000 per 10 grams. Financial analysts argue that gold imports are devouring the nation’s savings while the common man perceives it as a ‘safe haven’. Let’s assess this.

Image Courtesy:, ponsulak

Some Statistics

Of the total global gold holdings, 50% is held as jewellery (mostly by the households), 17% as official holdings (say the Central Banks) and 1.2% by the industrial sector.

Clichéd as it is but India is among the largest importers of gold. It accounts for an estimated 20 to 25% to the total global gold imports. This is solely because the domestic supply is meager vis-à-vis the demand. Furthermore, the amount of gold held with the public is astonishingly approximated to be 18000 to 40000 tonnes, valued between US$ 827 to 1840 billion. This valuation excludes the gold held by the affluent temples of India. The Government of India, on the contrary, holds only 360 tonnes.

Following the gold demand in India, the country’s CAD is at US$ 1.2 billion. Consequently, the debt of the country increased from US$ 112 billion in 2007 to US$ 390 billion in 2013.


(Source: IMF, World Gold Council)

India’s Gold Policy at a Glance

Till the British rule prevailed in India, the inflow and outflow of gold was restricted especially during the World Wars, owing to the Classical Gold Standard of 1875. That is, the currencies of the countries all around the world were a function of the gold reserves held by the respective country.

Post independence the government policies continued to be highly restrictive as gold reserves were directly related to the Forex held by India. Hence, the policy making was centered at reducing the domestic demand by discouraging savings and investments in the form of gold. This was primarily governed by the Foreign Exchange Regulation Act (FERA) of 1947, 1973 and the Gold Control Act 1968 which, directly or indirectly, aimed at curbing the gold imports and exports. The already depressed scenario was worsened when, in 1956, the government gained control of the gold mines in southern India. Because of a highly restrictive economy, smuggling of gold became rampant coupled with consequent generation of black money.

The economy was not relieved until the golden summer of 1991, when the Indian government took to Liberalization, following the balance of payment crisis. The Gold Control Act 1968 was repealed and the provisions of FERA were re-formulated to frame the Foreign Exchange Management Act 1999. Consequent efforts were made to discourage smuggling and encourage flow of gold through legitimate means.

What Finanlysts Feel V. What Indians Want

The Indian consumer behavior towards gold can be captured by the famous quote by the renowned economist, Sir John Maynard Keynes: the ‘ruinous love of a barbaric relic’. And that is exactly what majority of the finance world opines of! Their reason is simple: Refrain from wasteful investments.

The most popular gold consumption in and around the world, especially in India and which is the crux of the whole debate is in the form of jewellery; because gold is a low reactivity metal, hence skin friendly. Jewellery making, however, involves about 18 to 35% of wastage in making, which, at this point, is an acceptable reason to believe that a wasteful investment doesn’t count for any returns.

Second, gold coins or gold bullions; the former is believed to be less liquid but the latter is believed to be better. However, gold in the form of bullions costs a fortune and cannot be afforded by the common man of India, who acquires gold mainly from a socio-cultural perspective.

Also, Gold ETFs or the exchange traded funds. Again, for India, such gold related financial instruments are biased towards the literate and the tech savvy population. The returns may be good but eventually it is a financial and an intangible asset. Consequently, ETFs are also exposed to volatility of the market. Hence, even the population under the literate and the tech savvy labels is discouraged to invest in Gold ETFs. Moreover, the gold jewellery invested in is because of the mere utility of it in the Indian culture: weddings, festivals, poojas, you name it! Plus, because it is a physical asset, it is more liable to be a safe investment than any of our financial assets (which actually failed during the global recession 2008!).

The phenomenal price rise of gold after 2008 is probably because of the restoration of people’s belief in gold being a safe investment, which drove up the demand for the yellow metal, thus pushing up the prices. No matter what the prices are, Indians will continue to buy gold; it is ingrained in them. And it is interesting to note here that gold is an investment that any individual of any strata of the society holds. It is free from the complexities of investing in stocks or bonds or any other financial asset.

It is also argued that holding gold is only a cash outflow in the form of storage and insurance costs and that it is not an income generating asset unlike the coupons and dividends attached to our bonds and stocks. Also, the capital gains earned on gold are taxable under the Income Tax Act 1961. Nevertheless, it still remains an asset that carries low risk and a high liquidity.

The Reserve Bank of India recently proposed to introduce gold swaps, that is, it would exchange old gold in its vaults for purer metal abroad. This would enable RBI to raise funds by using it as collateral or sell it to defend the value of rupee. The sentimental value attached to gold, however, can impact the execution of such a step. Whether investment in gold is profitable or not can be argued on countless reasons. What remains is that the gold held with the public has proved to be the strength of the country time and again and will continue to be. The influence of the Western world on Indians to stop buying gold may be seen as nothing more but their hegemony.

This article has been authored by Aishwarya Mohan from Symbiosis Institute of Business Management, Bangalore


Mishra, Rabi N. & Mohan G. Jagan (2012) Gold Prices and Financial Stability in India. Reserve Bank of India, Department of Economic and Policy Research.

Kannan, R; Dhal, Sarat (2008) India’s demand for gold. Indian Journal of Economics and Business.

Verma, T. (2011) Sizzling Metals. Business Today

Parker, S. (2013) All that glitters is not gold. World Finance

Choudhary, S. D. (2014) Gold swaps to cut imports. Reuters


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