Latest public data shows India ranked at 10th in largest gold holding but the picture is partly untrue. As per the World Gold Council, Indian households hold an estimated 24,000-25,000 tons of gold, exceeding the world’s top holders combined official holdings of the US, Switzerland, Germany, and the IMF.
- Talking about GDP share- Out of 40% of India’s GDP value locked up in gold; only about 20% of this gold is used for loans or consumption, leaving the remaining 80% untapped for economic activity.
- Gold’s cultural significance in India’s emotional attachment is undeniable – Indian households are sitting on a $1.5 trillion hoard of gold, the biggest of its kind, largely made up of jewelry, which families often inherit or are gifted at weddings and kept in safe lockers.
- Impact on Risk Tolerance: This large, inactive gold holding might suggest a more risk-averse society, preferring the perceived security of gold over other potentially higher-yielding investments thereby missing opportunities.
Recent Raise in Gold Price and its effect on Indian households.
As per Geojit Financial Services study last year, The Indian households owning around 27,000 tons of gold loosely translates to them collectively getting richer by ₹23.49 Lakh Crore or approximately $300 billion. To get the numbers in perspective, $300 billion is about 9% of India’s GDP of around $3.4 trillion (at the end of FY 23), a massive wealth effect for a country that got the alias of ‘Golden Sparrow’ generations ago as it eagerly accumulated the yellow metal in lieu of its abundant exports.
Gold loans market
Gold loans allow consumers to draw up to 75% of the value of the metal. Approximately 20% of household gold is pledged. But the money is used mainly for financing contingencies and consumption. It is rarely used for investment.
According to a KPMG study, in 2019, total gold loans outstanding in the organized sector were 5.5% of India’s total household gold holdings, which indicates a low market penetration. India’s demand for gold-backed loans has only risen as its global price has approached $2,000 an ounce, allowing families to borrow larger amounts against their holdings.
Banks can charge interest rates of about 7% to 15% while institutions like Manappuram and Muthoot Finances can charge rates from 12% to 29%. KPMG consultancy estimates that 65% of India’s $46 billion gold loan industry is dominated by informal lenders, whose interest rates can range from 25% to 50%. In many parts of India, particularly rural areas, the pawning of a woman’s ornaments is often viewed as a last recourse for families who have run out of options.
According to KPMG study, Bank and Gold Loan financing are seeing speedy growth as processing gold loans are taking less than an hour and collaterals are easy to sell in the event of default. One another reason is informal economy which hold gold.
How is this contributing to our economy?
- Export of Plain Gold Jewelry- Out of total Value: of $37.47 billion (provisional data for April-March 2023) a part of $5.29 billion Total Gems & Jewelry and Diamond Export play a significant role. (Source: Gem & Jewellery Export Promotion Council (GJEPC) – https://gjepc.org/)
- Against the formal economyA significant portion of gold might be held within the informal economy, hindering tax collection and financial inclusion. Below 3% Indian pay tax which result major part of this asset convert of informal economy.
- Increased Imports: Value: $35 billion (as per data from the Ministry of Commerce & Industry) F.Y. 22-23 ; India is the second largest gold importer Globally which impacts largely on India’s Trade deficit and Rupee depreciation.
- Dead Capital: Currently India holds $2 trillion worth of Gold reserves against $1.2-$1.4 trillion of Bank deposits which has direct multiple effect on economic growth. (Source: RBI Sep-2023)
Are we missing any rally against Equity????
- In 20 years – Nifty Equity has generated 14.7% returns which means growth by 15.5 times multiples.
- In 20 years – Gold has generated 11.90% which means 9.4 times money multiples
- In 20 years – Aditya Birla Flexi cap Mutual Fund has returned 17.80% meaning 26 times multiples.
Clearly, GOLD has outperformed INFLATION but underperformed EQUITY on a large scale.
Our Understanding….
Gold is a good tool against inflation and volatility, but Gold has seen cycles where it has underperformed for many years – 2012-2019, 1996-2003,1980-1990.
We believe one should have some allocation in Gold but over obsession will only hold one back from creating adequate wealth in the long run.
Equity as an asset class has outperformed Gold at large. Equity can play a significant role for wealth creation over years along with our India’s Economy growth story and progress.
We believe, Indian’s now should think investing more instead of only saving in Gold for their generations, one should take route of Equity for Long term Wealth Creation.
Sources:
- Gem & Jewellery Export Promotion Council (GJEPC) – https://gjepc.org/
- KPMG study
- Geojit Financial Services
- RBI Sep-2023
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Please consult your Mutual Fund Distributor before investing. The views expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the above-mentioned schemes / fund/ asset class.
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