Is it a fling or is it love? A look at India's affair with gold

Gold is perceived in as the oldest, safest and most loved asset class. It continues to thrive even in the times of uncertainty, owing to its ‘safe haven’ status. Investors turn to the yellow metal as a hedge against political and economic tumult, with its price jumping during wars, contested elections, economic crises – and pandemics.

Price of gold trebled from early 2007 to 2011. A sharp rise was witnessed last year too, as it breached Rs 56,000 per ten grams in August 2020. It outperformed most asset classes that had taken a Covid beating. After correction for the first three months of 2021, gold prices are on the rise once again.

India owns one-eighth of gold mined worldwide

Estimates available until 2019 by the World Gold Council (WGC) suggest that around 197,576 tonnes of gold have been mined throughout history, of which two-thirds mined since 1950.

Trivia

Since gold is virtually indestructible, almost all of this metal is still around in one form or another. If every ounce of gold was placed together, the resulting cube would measure only 21 metres on each side.

India is the world’s second-largest consumer of gold and according to a WGC estimate from 2019, Indian households own the world’s biggest private stash of gold at about 25,000 tonnes, worth around Rs 110 lakh crore at today’s price.

The pandemic-induces high prices caused demand for gold to fall by 35% to 446.4 tonnes in 2020. The total gold jewellery demand in India in that period was also down 42% at 315.9 tonnes as compared to 544.6 tonnes in 2019.

However, many experts are betting on positive demand for gold returning. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel Broking said: “Weak dollar, fear of inflation and the increasing Covid cases in Asia are turning the heat on gold prices. We are not over with the pandemic yet and most of the global world is in a second and third wave of the virus which makes growth look hazy and the central banks promise to do whatever it takes to bring back normalcy in the economy. These are push factors for gold prices to rise further.”

Feroze Azeez, Deputy CEO at Anand Rathi Private Wealth, however, disagrees.

“Seven out of the top-10 countries (according to their gold reserves in tonnes) have not added gold to their reserves in last five years and are unlikely to add more. Given that the outlook on gold, demand is not promising and the yellow metal is unlikely to give great returns in the near future,” he said.

Digital Gold & Emerging Trends

India’s average annual gold demand has been over 800 tonnes in last decade due to the country’s innate love for the precious metal with incalculable traditional value. Indians tend to buy gold for all reasons and all seasons. The preferred options being jewellery, coins, and bars. But today, there are more ways to obtain this precious metal.

According to Association of Mutual funds in India (AMFI) data, a recent trend emerging since the onslaught of the pandemic indicates that Gold ETF folios in India have expanded two and a half times from 599,931 folios in May 2020 to 1,513,531 folios in April 2021.

In the just concluded financial year, gold exchange traded funds (ETFs) saw record net inflows worth Rs 6,918 crore, the highest ever in a year. Net inflows in gold ETFs jumped a massive 328% year-on-year from Rs 1,613 crore in FY20. These were in line with the rally in global gold prices.

As for the Sovereign Gold Bonds (SGB), a total of Rs 25,702 crore has been raised through the scheme since its inception till end-March, according to the RBI annual report. Of this, RBI issued twelve tranches of bonds for an aggregate amount of Rs 16,049 crore (32.35 tonnes) in FY21.

Gold — A saviour in crisis

Covid crisis in India has led households and small businesses to borrow against jewellery, coins and other gold items like never before. As per official data of the Reserve Bank of India, during the pandemic-led lockdowns which led to businesses being shut, jobs lost and salaries slashed, Indians have been pledging their household gold savings to borrow money to meet essential expenses as well as emergency medical requirements.

RBI said, “Loans against gold have jumped a whopping 82% since March 2020. At the same time, consumer durables and education loans are down by 21.4% and 3%, respectively, showing how people affected by the pandemic are prioritising their spending.”

The data points out that outstanding loans against gold jewellery went up from Rs 33,303 crore in March 2020 to Rs 60,464 crore in March 2021, pushing the overall personal loan portfolio of financial institutions up by 10.02%. The data fine print shows none of the other forms of loans have seen such a jump.

Pledging gold as collateral cuts the borrowing cost drastically compared with unsecured personal loans, and enables poorer households to access credit they might not otherwise raise.

Gold Outlook

Experts believe what makes gold shine bright in the eyes of investors is the seemingly semi-permanent feature of the global economy – low interest rates. Higher interest rates make investors lose money by holding gold because of storage and insurance costs. Right now however, the yields are negative and leading to gold turning cheaper than holding US treasuries. Normally, gold is also disadvantaged against other assets due to lack of earnings such as interest payments. However, in an era of falling returns, it has emerged supreme.

In the report titled ‘Gold Demand Trends For Q1’, WGC said, “Substantial wedding purchases, encouraged by declining gold prices and improving consumer sentiment buoyed by a pick-up in economic activity supported Indian gold jewellery demand in Q1. Demand was 39% higher Y-on-Y at 102.5 tonnes, although it fell short of the 125.4 tonnes from Q1 2019. The value of jewellery demand in Q1 grew 58% Y-on-Y to a first quarter record of Rs 43,100 crore. Robust retail demand pushed the local market gold price premium to a 51-month high of US$7/oz in early March.”

However the report mentioned that as new lockdowns are imposed in various areas of the nation in response to rising Covid-19 cases, consumer confidence has dipped. This is likely to impact wedding demand in Q2, although the effect may be tempered by digital and omni-channel retail strategies being developed over the last year.

Anuj Gupta said, “We are expecting 15% to 20% return also in this year in gold and silver. Inflation, geopolitical tension and higher crude oil prices support the gold and silver. Investors should buy gold for long term for return in the investments. We expect gold to touch Rs 54,000 to 55000 levels till Diwali and $2000 to $2050 in international market.”