Gold rush spikes create magical wealth effect in India

The USA reasserted its prowess as a global tour de force, it seems, as the phrase ‘when America sneezes, the world catches cold’ aptly applies to the current up-swing in the Bullion market.

Albeit, this time, America has not ‘sneezed’, but the U.S. Fed has merely dropped a hint about ‘rate cuts’ in the near future, and the world got infected with gold-lust.

In 2023, gold prices in India rose 15.76%. 10 grammes of 24-carat gold that was priced at ₹55,220 by the end of December 2022, rose to ₹63,920 on December 01, 2023.

In US market, spot prices rose to $2,075 per ounce to beat the previous all-time high of $2,072 reached in 2020. Lower interest rates reduce the opportunity cost of holding zero-yielding gold, which aids yellow metal prices.

This stupendous rise in gold prices can be directly attributed to the rise in geo-political crises. Also, the Federal Reserve had stopped raising rates and recently US Federal Reserve Chair, Jerome Powell remarks increased traders’ confidence that the U.S. central bank had completed its monetary policy tightening and could cut rates starting March 2024.

What it means for Indians?

In the current calendar year, spike in gold prices brought a gain of ₹8,700 per 10 grammes of gold that translates into ₹87 crore per tonne gain. As per V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, Indian households own around 27,000 tonnes of gold. This loosely translates to Indian households collectively getting richer by ₹23.49 Lakh Crore or approx. $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 sobriquet of ‘Golden Sparrow’ eons ago as it eagerly accumulated the yellow metal in lieu of its abundant exports.

Somasundaram P.R., MD of World Gold Council says, “because of high gold ownership in Indian households, people feel richer when gold prices rise. This brings in positive sentiments and promotes risk-taking behaviours.” At the same time, he also adds, “Gold sitting in the vault is of no use until it gets monetized for economic activity.” Indian households are sitting on around $2 trillion (₹160 lakh crore) worth of gold reserves. In contrast, total bank deposits in India stood at around ₹180 lakh crore at the end of FY23.

India is the second-largest bar and coin market globally. In the last decade, an average of 187 tonnes of gold has been annually utilised in India for this purpose.

As per Vijayakumar around 20% of household gold is pledged. But the money is used mainly for financing contingencies and consumption. It is seldom used for investment. According to a KPMG study, in 2019, total gold loans outstanding in the organised sector were 5.5% of India’s total household gold holdings, which indicates a low market penetration.