India's Gold Rush

Gold is one of the two assets that almost every urban indian household buys (property being the other one). Looking at some numbers helps comprehend the quantity of gold Indians buy, gold reserves that we hold and the impact that this gold rush has on the nation's economy as a whole.

Indian households are estimated to have 18000 tons of gold reserves. That is about the same as the total gold reserves of top 6 countries in the world put together - US, Germany, Italy, France, China & Switzerland). India's offical gold holdings are only 557 tons (all numbers based on World Gold Council data as of Dec 2012). Some interesting statistics about Indian's love for gold:

• Indians have one of the highest savings rate in the world - 30% of their income is saved. Out of this, 1/3rd goes to buy gold.
• Gold as a percentage of Indian household savings is 10% (vs) to Equities at 3%
• In the past decade, household gold consumption has increased @21% p.a Y-o-Y
• India is the largest consumer of gold (864 tons in 2012, 983 tons in 2011)
• India accounts for nearly one-third of the total world demand for gold

Why are indians crazy after gold? 

• Traditionally Indians likes to hold gold as it is seen as a sign of wealth
• It is one way of passing on wealth through the generations
• In modern living, gold is considered as a hedge against inflation
• The liquidity quotient of gold is high relative to other financial assets (pawn shops, Gold loan businesses offer instant cash for gold)

Is there any downside of investing heavily in gold?

At an individual level, your earnings are locked up in an unproductive asset class. It is neither productive to the individual (does not generate regular income) nor to the nation (locks up capital that can otherwise be used to invest in nation building). Gold has no value until the day you sell it or exchange it for services. And this is no longer a commodity whose price is determined by actual demand/supply. Gold also has its peak/off-peak and bubble bursts - it has lost 24% year-to-date and 32% from its peak in mid-2011. Price gets decided in derivatives markets by speculators rather than the demand from actual buyers.

What impact are we causing by storing our earnings in gold?

• Gold significantly impacts India's current account deficit (CAD = value of our exports - imports), which is currently around 5% of GDP (India's GDP: US$1.87 Trillion)
• 40-45% of India's import bill comprises of Oil & Gold
• If you remove gold from this equation, India's CAD would fall to <0.6% of GDP
• In absolute terms excluding gold reduces our CAD from $40 bn down to just $12 bn

Bottom line is India owes external parties a huge bill due to the gold rush habit of Indians.

So, does the Indian government take any measures to reduce the impact to our economy from this mad gold rush of Indians? Part II of this series looks at the various measures..