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| Gold Is Always In. |
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| There is no rationale that can explain an indians passion for the yellow metal |
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THE LOVE for gold is as Indian as, say, the sari. The root of the Sanskrit word for gold, hiranya, is hri, which means imperishable. The ancients knew what they were talking about. Gold is physically and chemically one of the most stable metals known to man. It finds use in an immense array of applications, right from being a filling for cavities to being the plating on a cellphone, batterys contact tips. However, the Indian fascination with gold has nothing to do with science. Gold is part of the Indian socio-cultural and religious fabric. Every rite of passage in every religion practised here involves some gold. And almost 90 percent of them consumption is for gold jewellery.
While the love for gold jewellery may be universal in most cultures, there really is no rational explanation for the volume of gold buying in India, the worlds second biggest market for the yellow metal after the US, with an economy l/26th its size. Nobody knows how much gold there actually is in this Country. But whatever be the figure, the volume of gold officially held by the country as a reserve asset forms only a tiny fraction of the total. As of September 2005, the Reserve Bank of India held 357.4 metric tonnes of physical gold, which makes for 3.6
per cent of its total external reserves. But estimates of gold in private hands range from a low of around 11,000 tonnes to a high of over 18,000 tonnes.
What is clear is that India is the worlds largest retail market for gold. Annual demand, according to the World Gold Council, is expected to top 850 tonnes this year, not counting old gold which is recycled. At an estimated 33 per cent for the whole year, India will also be the worlds fastest growing market for physical gold. Consumption in the second quarter of this year alone shot up by 47 per cent over the same period last year. Record gold prices-currently around Rs 6,950 per 10 gm, as well as record stock markets, are merely denting demand. In fact, the latter may actually be fuelling demand for the former. Profits from financial markets, traditionally perceived as risky, are parked in safer havens like real estate and gold. Which probably explains the jump in real estate and gold prices in India.
The current surge in prices is also not unusual. Historically, global gold prices, including in India, have risen in the September-October period every year for the last five years-and this year is no exception. Strong economic growth in India and China, which is the worlds third biggest gold market, have also helped boost prices. But high prices do not necessarily translate into high returns. In fact, gold, adjusted for inflation and the real value of the rupee, gave negative returns as an investment for most of the Nineties.
This is the real reason why central banks, as a rule, are not great believers in the anti-inflationary powers of gold. Most keep some for emergencies, since gold is still easily tradable. This India discovered, when it hocked a part of its gold reserves in 1991 with the Bank of England to shore up its dollar reserves and avoid defaulting on foreign loan repayment liabilities. Since then, though, despite ballooning foreign exchange reserves, it has not bought gold in a big way. In fact, most central banks have been steadily selling gold. There are several reasons for this. For starters, gold is a poorer hedge against inflation. It is also difficult to enter or exit in large quantities-central banks deal with tens or even hundreds of tonnes, remember-without a major price reaction, which defeats the purpose of the transaction.
At the individual level, however, most of these arguments go out of the window. Individual buyers, as a rule, tend to look at nominal prices and not at inflation-adjusted real prices. Individuals also deal in small quantities and there is a ready market for gold. And in a country that is still largely rural, with large chunks of the population out of banking coverage, the yellow metal continues to enjoy high acceptability as collateral. Besides, gold is a bit like a Maybach car. It may not make much economic sense, but it ii fancy, expensive and feels good to have. And thats an argument few economists can beat.
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