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India’s Love Affair with Gold

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We focus on India a lot. Why? Because Indians have a love affair with gold. It’s not just a luxury. Even the poor buy gold in India.

There are two main reasons to follow the Indian gold market closely. First, the country ranks second in the world in gold consumption. What happens in India can have a major impact on the world gold market. Second, the attitude of the Indian people can teach us a lot about the wisdom of buying and owning gold.

After a lull in demand last year, Indians have already purchased more gold this year than they did through all of 2016. We saw their passion for gold on vivid display when  Indians bought more 23 tons of gold in a single day during the Akshay Tritiya festival. But what drives it? Why do Indians seek gold?

A recent article at MoneyControl.com sheds some light on Indian attitudes about the yellow metal.

Sentiment, religion and customs ensure that most people keep their faith in gold. The birth of a child, or a marriage in the family, invariably translates into some purchase of gold. During gudi padva and dhan teras festivals the better-off purchase some gold, as it is considered auspicious. There are good economic reasons, too, behind the purchase of gold jewelery by rural folk. It remains the best hedge against inflation and can be easily mortgaged with any jeweler or pawn shop in exchange for urgently needed cash.”

Indians understand that gold tends to store value, and that in the end, gold is money. If they have gold, they know they will be able to get the goods and services they need – even in the event of an economic meltdown. And while westerners may not embrace the cultural and religious aspects of the Indian love affair with gold, the economic reasons for their devotion to the yellow metal are every bit as applicable in places like the US.

If you want to understand why Indians hold gold, just look back to earlier this year when the government launched a demonitization scheme.  The idea was to push Indians into putting their hoarded cash in the bank – thus bringing it “out of the shadows.” The demonetization policy resulted in severe cash shortages in some areas of the country.  Many Indians skirted the government scheme by using their black money to buy gold. When everything else collapsed, gold was there to save the day.

Indians value gold so highly, many are even willing to risk prison to get it. Gold smuggling is rampant in India. Officials estimate smugglers bring 100 tons of gold into the country every year.

And prices don’t seem to significantly impact Indian gold purchases. They even buy gold when the price is high. Weather actually has more of an impact on the Indian gold market than price.

The reason why people expect gold demand to surge is because there is a strong correlation between good rains, higher rural purchasing power and bigger purchases of gold. The price of gold has little to do with it. India suffered three years of drought until 2015. 2016 saw good rains, but then demonetization struck. This year, too, rains are likely to be good. The forecast is, therefore, for gold purchases to go up.”

When Indians have money to spend, they invest in gold.

We can learn a lot from the Indian love affair with gold. The people of India may live half a world away, but economics knows no borders.

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Photo by 2il org via Flickr.


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