India’s Gold Fetish – Know Everything Here

May 22, 2015 Gold Investment 3 min read
India’s Gold Fetish – Refuses to Die

Government measures and investor education to curb a nasty fetish seem to be failing. Again.

A massive current account deficit (4.7% of GDP in FY13) forced the Government to introduce curbs on wasteful gold imports. This combined with high prices had the effect of lowering demand to some extent, which is now once again on the upswing.

Widespread declines in gold demand were seen in most countries throughout 2014. Yet, India remained an exception to this trend clocking record demand of 662.1t as per WGC estimates, topping the previous year’s total by 8%. This in spite of government measures designed to restrict gold imports being in place for much of the year. Wedding- and festival-related purchases drove robust demand of 179.1t in Q4 CY2014, up 19% over Q4 CY2013. However, the real spike was to come in the last 3 months of the fiscal year.

Demand in FY15 has reacted to continuously falling prices. The trend in overall FY15 shows that while volume has jumped a massive 48% over FY14, value has grown only 3% (due to lower prices):

Gold Fetish 1Data source: DGFT

More worryingly, the value of gold imports in March 2015 reached INR31,122.48 crs, nearly doubling from the same month last year, which followed a 49% YoY increase in February 2015 (data source: Ministry of Commerce) – given that prices have remained low, this growth has been due to massive increase in volumes.

Gold Fetish 2Data source: DGFT / Commerce Ministry

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Some developments over the past 3-4 months that have encouraged this trend:

  • Scrapping 80:20 gold import rule: The rule imposed in Aug-14 in response to the growing CAD essentially mandated traders to export 20% of their all gold imports. The rule was scrapped in late 2014 by the Government and is said to have not gone down well with the RBI
  • Reduction in import tariff on gold in Mar’15: This basically lowers the customs duty imposed on gold
  • Ban on import of gold coins and medallions by banks lifted by RBI
  • Overall direction on tariffs and quotas encouraging shift from smuggled volumes leading to rise in officially imported gold

Finally, to gauge how wasteful investment in gold is, consider the returns provided by various investment options:

Gold Fetish 3Data source: NSE / Yahoo Finance

The drawbacks in gold investing are only too well known:

  •      No income potential (rentals, dividend, interest)
  •      Cannot be leveraged up
  •      Safety and security concerns involved in dealing with physical gold
  •      Physical gold is illiquid
  •      Impurities are difficult to gauge for the common man
  •      No real appreciation; rise in gold values correspond with fall in value of paper money

Quite aptly, Warren Buffett blasted gold investing in his 2011 shareholder letter calling it an “unproductive asset.” He said that assets like gold “will never produce anything, but are purchased in the buyer’s hope that someone else will pay more for them in the future.” He went on to say that the owners of assets like gold “are not inspired by what the asset itself can produce — it will remain lifeless forever — but by the belief that others will desire it even more avidly in the future.”

This of course is apart from the damage that gold demand does to India’s balance of trade, currency and fiscal position. While a significant portion of demand is secular in nature and will remain (jewellery, gifting, etc.), greater faith in mainstream investment options, financial markets and the banking system should hopefully encourage households away from the yellow metal. Then, the aura of aurum will have truly faded.

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