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The Indians' Craze For Gold

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     on  30 April 2012    

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Gold is a precious metal which is well-known for its shiny, yellow colour. It got its name 'gold' from an Anglo-Saxon world 'gelo', which means yellow. On the other hand, in Chemistry, it has been assigned with the symbol 'Au' which has been derived from the Latin word 'aurum'.

 

Gold has always been an object of desire for individuals, investors as well as the government's national treasury. After all, there is no other object in this world equivalent to the paper currency and it’s value. Gold prices have always had the tendency to be well above prices of all other commodities.

 

Even though millions of Indian people live in poverty, India is the world's largest consumer of gold. Not just a luxury for the rich, every family acquires and gives gold on special occasions. From a bride's wedding ornaments to a baby girl's first gold earrings or the gold grain placed in the mouth of a deceased loved one, gold is the touchstone of status and security. Gold finds its place in places of worship as well.

 

Some interesting facts on India and its Gold consumption:

 

a. India accounts for around 20 percent of the world's demand, with an annual demand of over 800 tons.

 

b. In the third quarter of 2011, year-on-year gold demand in India is up 15% in tons and 46% in value (US$), as reported by the World Gold Council in November 2011.

 

c. Gold Jewellery demand in India, the world’s largest gold jewellery market, rose 67 percent year-on-year to 272 tons in the first half of 2010, despite the higher gold price.

 

d. Over the past decade, gold demand in India has increased at an average rate of 13 percent per year, outpacing the country’s real GDP, inflation and population growth by 6 percent, 8 percent and 12 percent respectively.

 

e. Since 1992, Indians have recycled an average of 92 tons of gold per annum.

 

f. Mining and production of gold in India is negligible, now placed around 2 tonnes as against a total world production of about 2,272 tonnes in 1995.

 

g. The gold rush has, however, meant that the government is grappling with a current account deficit as $41 billion worth of gold was traded in the past one year, constituting 11% of the total imports in 2010-11.

 

h. Gold import value for the year 2010-11 was higher than the budget estimated expenditure on Urban Development, Housing, Family Welfare for the year 2010-11

 

i. India’s gold imports were higher than the twelve states GSDP in the year 2010-11.

 

Given below are details of India’s Gold import during last one decade:

 

Gold Imports - US Dollars (US $ million) Year

Gold Import

Total Import

Percentage Share

2001-02

4170.4

51413.3

8.1

2002-03

3844.9

61412.1

6.3

2003-04

6516.9

78149.1

8.3

2004-05

10537.7

111517.4

9.4

2005-06

10830.5

149166

7.3

2006-07

14461.9

185735.2

7.8

2007-08

16723.6

251439.2

6.7

2008-09

20725.6

298833.9

6.9

2009-10

28640.1

288372.9

9.9

2010-11

33875.8

352574.9

9.6

 

While the country exports about 60 tonnes of the metal annually, it imports about 600 tonnes. According to figures with the Multi Commodity Exchange of India, the total stock of gold in the country is about 13,000 tonnes, which is about 9 percent of the world stock.

 

In many Indian cities, gold buying is picking up as an investment tool with lot of experts advising people to buy bars and coins or in dematerialized form. Now there are ETF's which gives  the facility to stock up gold in dematerialized form, where for a small fee, the hassles of storing gold is taken care by the mutual fund companies. The rise in the gold price in recent years has attracted a lot of investors’ attention when most of the stock markets crashed during recession.   

 

Another reason behind Indians rushing for gold is that we always consider the precious metal as the best hedge against inflation which is running high.

 

Is Gold price in a bubble territory?

 

General economic theory says when the price of a good or service goes up   its demand comes down. But the passion of Indians to acquire gold at any cost, and quite literally so, has defied this logic in 2010/2011.  The demand for or the price of the yellow metal  in India  is not expected  to tumble in the near term too,  though temporary corrections in prices are likely to happen  depending on the fluctuations in world  markets, exchange rates  and the periodical changes in  government Gold policy.

 

There are economists who apprehend and warn that the gold prices may have now entered a bubble territory. It is however argued  that a deep fall, if any  in gold price may  only help the Indian economy as gold  held by  common man  in large quantities  will be reallocated into productive assets like  stocks  and bank deposits thus  boosting  India’s  growth story.

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