Some facts you must know about investing in gold in India

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Recently, major stock indices such as the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) crashed due to India’s surgical strike in Pakistan. However, despite the negative market sentiments, the ‘prices of gold’ remained unbeatable. So, why didn’t the prices of gold affected by the bearish wave? Let’s try to understand how and why gold is a better investment option.

India is one of the largest importers of gold in the world. India accounts for nearly one-third of the total world demand for Gold. Based on an official report, Indian households hold more than 20,000 tonnes of gold – which is the largest stock of gold in the world.

In fact, gold has always been considered as a safe haven asset throughout history as it has been viewed as a store of value and a means of exchange for millennia. Gold is essentially a currency which cannot be manipulated by the interest rate policies of the government and has traditionally been used as a hedge against inflation or a falling dollar price.

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Due to its high liquidity, financing against gold has caught on very well with banks. With a huge base of stable and growing depositors coupled with a larger number of loan seekers, banks have become a vivacious hub for gold activities – both for buying as well as lending. The importance of Banks in this activity cannot be undermined and as the demand for gold grows, it will increase the importance and effectiveness of banking sector -largely for its trust as well as affordable lending rates.

The Indian gems and jewellery sector is among the most competitive in the world, contributing to 65% by value, 85% by carat and 92% by the number of pieces globally, and accounting for more than USD 36 billion of total Indian exports as in 2014-15.

Inaugurating the 9th International Gold Summit & Excellence recently organised by ASSOCHAM, Chairman, Parliamentary Standing Committee on Finance, Veerappa Moily said: “Need policies for promoting gold as an investment of the country; shall suggest appropriate policies to standing committee. The domestic saving coming down drastically and the gold can play an important role in the economy of the country,”

 The sentiment towards the yellow metal remains very high irrespective of the rise/fall in prices and this love for the commodity has made the nation heavily reliant on imports of commodities. Petroleum crude accounts for about 34 percent of the total inward shipments, followed by gold and silver (12 percent of the total imports), machinery (10 percent), electronic goods (7 percent) and pearls, precious and semi-precious stones (5 percent)

He also said that as per estimates, India is the world’s largest buyer of Gold followed by China and both countries account for over half of the global demand for gold. India has an estimated private gold stock of 20,000 tonnes worth $1 trillion, while it mines only around 1.5 tonnes. About 35% of the Gold demand in India are for investment purpose and is held in the form of bars and coins.

Moily has also indicated that 40% of the world gold stocks are lying in India in the form of jewellery and some temples. The World Gold Council estimates the annual consumer demand for gold will be an excess of 1,200 tonnes, at a value of Rs 2.5 trillion, by 2020.

The gold policy until economic reforms in the early 1990s centred around the major objectives of discouraging people from purchasing gold, reducing domestic demand, regulating the supply of gold, curbing smuggling and black income and conserving foreign exchange.

He also said that to restrict the rising trend in gold imports, which is adversely affecting India’s balance of payments, measures were and are being taken by the government. In order to keep a check on the current account deficit, the UPA government had imposed import restrictions on gold, oil and other commodities. Now the government has come up with two schemes, Gold Monetization Scheme (GMS) and Sovereign Gold Bond Scheme (SGBS).

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Over the past decade, the Indian gold industry has significantly matured. The market currently has several participants from Bullion Banks, Government Agencies, Premier Trading Houses, Precious Metal Exchanges, Institutions offering Gold Loans and Gold ETF’s. However, the market needs policy action from the regulators for further growth of the gold industry in India.

Moreover, Asia has emerged as an extremely important market for the global gold trade. Five countries- China, India, Singapore, UAE and Thailand together last year imported 2,581 tonnes. In other words, nearly 60% of the total global supplies flowed into these countries.

The annual consumption of gold, which was estimated at 65 tonnes in 1982, has increased to about 1000 tonnes presently. About 80% is for jewellery fabrication for domestic demand, 15% for investor demand and barely 5% for industrial use.

Despite the fact that India is the world’s largest consumer of gold, there is no reference point for gold prices in the country. Though it is the leading player in the import and trade in bullion and export of jewellery, it does not exert any significant impact in the discovery of gold prices in the international market. The reason is that country’s bullion trade is fragmented and unorganised.

The Government of India has implemented a hallmarking scheme to protect the consumer in purchasing gold jewellery of requisite purity, develop export competitiveness and make India a leading market for gold jewellery in the world. Hallmarking is the accurate determination and official recording of the proportionate content of precious metal in precious metal articles. The principle objectives of the Hallmarking Scheme are to protect the public against adulteration and to obligate manufacturers to maintain legal standards of fineness.

In order to make India the global gold trading hub, it is imperative to identify the bottlenecks present in the Indian bullion market and to create a momentum to remove such inefficiencies in a gradual but steady manner. Most importantly, the institutional and policy-level issues associated with different sections of the gold market have to be addressed by the government in coordination with the different regulatory bodies.