
Issues with high gold demand
Apr 16, 2022
Issues with high gold demand
Q What is the context ?
A Gold’s appeal as a safe haven is only rising: as tensions escalate in Ukraine, its price is approaching records.
Q What are factors explaining demand for gold in India ?
A
- India is the world’s second-largest market for the yellow metal, behind China, though it produces almost none at home.
- This is partly driven by tradition.
- Brides are given jewellery as part of their dowry and it is deemed auspicious to buy bullion around certain religious festivals.
- It is a handy store of undeclared wealth, too, often stashed in wardrobes or under the mattress.
- But the pandemic has also affirmed an investment advice passed on over generations: park savings in gold as a rainy-day fund.
Q What are concerns with such a high demand ?
A
- Vast gold imports can destabilise the economy.
- During the 2013 “taper tantrum”, when India’s foreign-exchange reserves were lower than they are now, a rush of gold imports helped push the current-account deficit to 4.8% of GDP and fuelled worries of a currency crisis.
- Savings stashed away as idle gold could be put to more productive use elsewhere.
- Indian households hold 22,500 tonnes of the physical metal—five times the stock in America’s bullion depository .
Q What are policy measures by the government ?
A
- Import duties hover around 10%, even after cuts in last year’s budget aimed at keeping smuggling in check.
- The central bank has ramped up issuance of sovereign gold bonds, which are denominated in grams of gold.
- Of the 86 tonnes’ worth issued since 2015, about 60% were sold after the pandemic began.
- And the gold monetisation scheme, which allows households to hand gold over to a bank and earn interest, was revamped last year to reduce limits on the size of deposits.
- Lockdowns inadvertently helped the state’s agenda.
- Mobile payments platforms like PhonePe and Google Pay reported rising appetite for digital gold, which is sold online and stored by the seller.
- Money also rushed into gold exchange-traded funds (ETFs).
- Their assets hit 184bn rupees ($2.5bn) in December, a 30% rise in a year.
Q What can be the Conclusion ?
A Still, only a sliver of the population, mostly well-off urban types and millennials, invest in complex financial products. A large part of India’s demand for physical gold comes from rural areas, where it seems in no danger of losing its lustre.