Gold: Demand, Supply and Impact
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India shares a unique relationship with gold, one that is very complex and timeless. From Hindu mythology to various cultural traditions, gold is deeply embedded in the Indian psyche. It’s a symbol of purity, prosperity, good luck, status and wealth. Every Indian, rich or poor, living in city, town or village, is a potential first time buyer or , as in most cases, a repeat buyer. Gold purchases serve a two-fold purpose- that of an ornament and an investment. The emotional and sentimental attachment to gold further adds to the complexity as gold is passed on from one generation to the next. Right from the time a child is born to the time of marriage, gold finds a place in all the rituals and traditions. In addition to this, the religious significance of gold in India means festivals and temple offerings are other important triggers for high sales of gold.
Our aim is to study what triggers the Indian consumer to buy gold, the changing trends in purchase behavior, the impact of this on India’s financial stability and to recommend ways to monetize gold or suggest alternate instruments that can curb the investment demand for gold in the country.
We analyzed the existing literature on gold to systematically understand current understanding regarding the factors that act as triggers for the Indian gold consumer. We will then compare this with our primary research in an attempt to draw a clearer picture of the gold market in India and suggest ways to monetize it.
Section 2: Brief Review of Literature
Section 3: Gold: Demand, Supply and Impact on Financial Stability
Demand for Gold
The ‘Report of the Working Group to Study the Issues Related to Gold and Gold Loans NBFCs in India’, constituted by RBI, states that the demand for gold in India cannot be compared with that of the demand for gold in other parts of the world. The 1.3 plus billion population of India would continue to generate demand for gold, especially through imports. The demand is from both investors in gold and gold jewelry consumers. Due to various cultural, religious, economic and social reasons, the gold demand in India is autonomous. The benefit that it offers by way of long-run inflation hedge, high liquidity and also, the absence of substitutes with similar risk-return profile makes it an attractive asset to store. The convenience of cash based transactions and absence of documentation hassle (no paper trail, tax obligations etc.) further makes it a preferred channel for money laundering. Hence the committee concludes that attempting to curb the gold demand in India would a difficult and complex task.
Also, historically gold has a been a measure of economic power of kingdoms and nations. In recent times, particularly after the 2008 crisis, gold as an investment asset has drawn attention and the prices of gold soared in the aftermath of the crisis. (International Journal of scientific research and management)
Studies show a strong correlation (0.83 for the 2006Q3–2013Q2) between gold imports and inflation expectations of Indian households, indicating that one reason for high gold demand is its use as an inflation hedge. (Selected Issues Paper on India, IMF, 2014)
Price Sensitivity of Consumers
The Bloomberg BusinessWeek article titled “Correlations: India's Gold Grab” says that the 23% fall in gold price since October, 2013 shifted the investors away from gold to risky but high return equities. Contrary to this, the Indian gold consumers took advantage of the price drop. Consequently, the purchases in April and May were so high that it began to show in the widening trade deficit. This mid-April slump was the largest in more than three decades and it pushed the banks, traders, and jewelers in India to import more than 100tons of gold. This indicates the complex behavior of Indian consumers with respect to gold price which does not match the typical investor profile. Yet most buyers of gold consider the metal from both consumption and investment angle.
Changing Trends of Consumers & Retailers
K. Balaji and Dr. Maheshwari in the research paper titled “A Paradigm Shift in the Buying Behavior of Indians Towards Gold Jewelry – A Theoretical Approach with Reference to the Growth of Branded Retailers” posits that as Indian jewelry market matures, the changing consumer preferences are expected to lead to a more organized industry while share of family jewelers is expected to decline. The Indian consumer is moving from unbranded to branded jewelry with fashion trends dictating more and more of the purchase decisions. Although, currently the market is fragmented across the value chain with more than 30,000 players with modern retailers making only 4-6% of the share. It further states that with rising population and income levels there will be an overall increase in spending, including spending on aspirational products which includes gems & jewelry. The tastes are changing and the consumer is focusing on more modern and intricate designs as compared to the traditional chunky ones. Isha Datwani, founder of Anmol Jewelers says, “The biggest change we see is that younger people are buying gold”. This working class of young Indians have their own views and opinions and the role of elders as influencers in gold purchase is reducing. Also this new set of Indian consumers has an increased focus on transparency, service, brands and fashion.
Also the new set of branded chains, through innovative branding and advertising, are targeting the aspirational class of Indian women by positioning gold as more than an investment, as something that is deeply rooted in our culture and intended to make a woman look more beautiful. The have resorted to new ways of segmenting and usage (e.g. creating new occasions for purchase) to attract new sets of consumers.
Source: Technopak Analysis
Section 3: Supply of Gold & Impact on Financial Stability
Gold supply comes from imports, mining, sales of gold reserves, and “old gold scrap” (the recycling of gold). (IJSRM volume 2 issue 2 Feb 2014). Against the backdrop of high inflation, negative real deposit rates, gain in international gold prices and expectations of further increase, India’s gold imports increased from about 1.5 percent of GDP in 2004-08 to 3 percent in 2011-13. (Muneesh Kapur and Rakesh Mohan) .
RBI gold swap scheme
A high inflation for long duration lowers the real rates, resulting in increased gold imports and decreased household financial savings. Gold imports in turn weaken the rupee and worsen the current account deficit. (Selected Issues Paper on India, IMF, 2014)
Considering the nature of demand for gold in India, restrictions on gold imports should be considered as a temporary measure as over time these may become less effective (e.g.: increase in smuggling). To ensure macroeconomic stability, we need to reduce the gold imports in long run. For this, its demand as ‘store of value’ must be curbed which is possible by lowering inflation and increasing real returns on bank deposits. (India Article IV Consultation, IMF, 2014)
Section 4: Measures to moderate the demand for Gold and monetize it
The RBI Reports describes various measures to curb the demand for gold and monetize the idle gold stocks:
- Gold Loans: These are a flexible channel to improve the financial inclusion in the country, especially for the illiterate and semi-literate people who may need to raise loans for medical emergency or need education loans or even for business loans by SMEs. There is a huge untapped gold stock lying idle in hands of individuals (anywhere between 18000 to 20000 tonnes), out of which only a small fraction (about 3 %) is being monetized through gold loans.
- Gold Bank: The Group has suggested the setting up of ‘Gold Bank’ or ‘Bullion Corporation of India’ as a ‘backstop facility’ that will lend (provide refinancing) to institutions against the collateral of gold. It can also play a role in retailing functions like recycling and pooling of idle gold.
- Gold Recycling: There is a large stock of idle gold, both with individuals and with institutions like Temples as devotees offer gold jewellery in large quantities. There is also estimated 300 tonnes of scrap gold that comes into the system every year. So, by finding means to recycle the idle and scrap gold, we can turn an unproductive asset into a financially productive one.
- Buy-back by Banks: Currently, banks are operating a uni-directional channel- importing and selling gold. The Group has suggested that the canalising agencies like banks and nominated agencies should function bi-directionally, i.e., they should also be able to buy back tamper proof gold coins at transparent prices.
- Monetization through banks: Another alternative that the paper suggests is to allow banks to accept gold deposits from the public and use these gold deposits as a hedge, thus monetizing gold till it is redeemed.
- New gold-backed products: The Working Group has also suggested introduction of gold-back products to monetize the idle gold stocks and at the same time reduce the demand for physical gold. These are broadly classified into five categories:
- Products like Modified Gold Deposit Scheme in which gold taken as deposit is recycled to meet domestic demand and returned at maturity, thus monetizing privately held gold stocks.
- Products like Gold Accumulation Plan, Gold Certificate, e-Gold Plan through Banking Channel, Paper Gold that facilitate systematic investment in gold. Gold Accumulation Plan would help those who can purchase gold in small amounts and delays the gold imports till the required amount of gold is accumulated and actually delivered.
- Products like Gold linked Account and Gold Securities which allow active portfolio management by providing flexibility to buy and sell gold similar to ETFs. Under Gold Linked Account the transaction takes place outside the country thus eliminating gold import.
- Products like Gold linked Dual Account and Gold Securitisation, which are derivative products that enable customers to take positions depending upon their view of gold prices.
- Products like Gold Pension in which the customer will keep his gold with the bank and in return receive a monthly pension.
Sheetal Dubey, Anamika Hardia (2014), “Demand & Supply Trends of Sparkling Metal”, International Journal of scientific research and management (IJSRM). Retrieved from http://ijsrm.in/v2-i2/7 ijsrm.pdf
Muneesh Kapur, Rakesh Mohan (2014), “India’s Recent Macroeconomic Performance: An Assessment and Way Forward”, IMF, WP/14/68. Retrieved from http://www.imf.org/external/pubs/ft/wp/2014/wp1468.pdf
International Monetary Fund, Selected Issues Paper on India, January 2014. Retrieved from http://www.imf.org/external/pubs/ft/scr/2014/cr1458.pdf
FICCI-Technopak Report on Unlocking the Potential of India’s Gems & Jewelry Sector, January, 2010.
K.U.B. Rao and others (2013), Report of the Working Group to Study the Issues Related to Gold Import and Gold Loans NBFCs in India, Reserve Bank Of India.
K. Balaji, Dr. Maheshwari (2014), “A Paradigm Shift in the Buying Behavior of Indians Towards Gold Jewelry – A Theoretical Approach with Reference to the Growth of Branded Retailers”
India, Article IV Consultation (2014), IMF Country Report No. 14/57,
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