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 ?

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 ?

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 ?

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.