A Rise in Indian Financial Literacy Tarnishes the Appeal of Gold

India has long been a crucial source of global gold demand, its voracious appetite second only to China’s.

Source Hindustan Times/Getty

Why you should care

Because the way Indians invest is changing.

That a gold trader in London has to watch the progress of South Asian monsoon rains says something about the depth of India’s love for the precious metal.

Farmers celebrate a good harvest by purchasing gold jewelry, to be gifted at weddings or kept for future generations. Others might buy the precious metal on religious festivals such as Akshaya Tritiya or donate it to a temple. Gold bracelets or nose rings feature prominently across the economic spectrum. Lakshmi, the goddess of wealth, is often depicted exuding a yellowish glow.

India has long been a crucial source of global gold demand, its voracious appetite second only to China’s. For millions of rural Indians, historically without access to bank accounts or even sometimes a steady supply of cash, hoarding gold was often the only way to store wealth.

But demand for the precious metal is waning, threatening to change the India equation for global gold investors. Prime Minister Narendra Modi’s government has embarked on an aggressive program to formalize the fast-growing economy, improve financial literacy and increase access to products such as mutual funds. Intended or otherwise, all this has contributed to a steady fall in gold demand, setting off alarms in the industry.

Earlier, gold was the only ultimate luxury for Indian households. Today it is not.

Somasundaram PR, managing director, World Gold Council in India

From a record high of more than 1,000 tons in 2010, consumer demand for gold in India has since fallen by about a quarter to 760 tons last year. A recent price rally has accelerated the trend. Global prices this month traded at a six-year high of more than $1,500 a troy ounce, leading some local prices to hit record levels. In value terms, gold imports fell 42 percent in July from a year earlier.

The most controversial of Modi’s initiatives, known as demonetization, involved a shock decision in 2016 to invalidate the majority of the country’s cash supply to flush out undeclared wealth (of which gold merchants were often ready recipients). That was followed by an overhaul of the indirect tax system.

Meanwhile, a separate scheme to increase access to banking has prompted the share of adults with bank accounts to more than double since 2011.

 

Newly financially savvy Indians realized they could enjoy higher returns investing in stocks and bonds rather than physical assets such as gold or property. This prompted a boom in mutual fund investing, with assets under management rising to 26 trillion rupees ($364 billion) at the end of May, almost doubling since demonetization. Meanwhile, the share of physical assets in household savings, including gold, fell.

A consumption boom has also created new competitors. “Earlier, gold was the only ultimate luxury for Indian households,” says Somasundaram PR, managing director of the World Gold Council in India. “Today it is not. A car is a luxury, electronics are a luxury, foreign travel is a luxury. Therefore it is cutting into the wallet.”

This has resulted in frantic efforts by authorities and industry bodies to reinvent gold as a financial asset fit for the government’s vision of a 21st-century digital Indian economy. About 24,000 tons of gold lies unused in households and religious institutions, according to a 2018 government report.

Efforts to draw that wealth into the financial system have mostly fallen flat. A so-called gold monetization scheme, whereby consumers could deposit their gold with banks and earn money on interest, has failed to catch on. Gold exchange-traded funds and sovereign gold bonds, which are not backed by physical gold but track the metal’s price, have also failed to excite investors.

“I don’t see wealth managers very equipped in educating their clients that you should diversify in gold,” says Nitin Bhasin, head of research at brokerage Ambit Capital. “The mindset is still, ‘If I’m buying gold, I might as well buy it in a format that it can serve a dual purpose,’” he adds, referring to its jewelry form.

One problem for India is that, despite the size of its market, it lacks a single, transparent benchmark gold price. A plan to fix that by launching a spot gold exchange, modeled after China’s successful Shanghai Gold Exchange, is gathering momentum after a consortium of banks and trade groups recently submitted a blueprint to the government.

Meanwhile, companies are looking to cash in on the shift. Paytm, an Alibaba-backed digital payments startup, launched a platform to allow users to trade gold from their mobile phones, with the option of delivery.

Paytm also plans to offer sovereign gold bonds as it expands into brokerage services. “It’s a very, very different market that we’ve opened up,” says Nitin Misra, a senior vice president at Paytm.

India’s deep affinity for gold is not going to change. But the shift in investment patterns is making the precious metal less relevant in the world’s second-largest market. It will require swift action to ensure gold thrives alongside India’s fast-developing financial markets rather than suffers because of them.

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By Benjamin Parkin

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