January 30 , 2013
18 October 2012
India's love affair with gold is known to the entire world. One-third of the world's annually gold mined is consumed by India. Would you be surprised to know that half of the amount of gold bought in India every year is for jewelry?
Most people don't fathom any harm in their act of accumulating gold. After all gold is wearable wealth. And this is true by all means. Gold symbolizes wealth and increases wealth. However our mode of possessing it is doing harm to the nation's economy in a bigger way than we probably imagined.
Economic problem with buying physical gold
As general level of wealth is increasing across middle income and higher income groups the demand for gold has been steadily increasing. Also when markets are gloomy gold turns to be the most preferred investment.
Where does all the gold we need come from? Very little gold is mined in India. 80% of the gold we buy needs to be imported. According to an estimate, in the year 2011-12 India's total gold import stood at 655 tonnes. This was much lesser than what we imported in the year before yet high enough to make our worried government think of ways to curb people's appetite for gold. It has increased customs duty on gold. RBI was even mulling banning sale of gold coins by banks to clamp down on imports.
But why should the government worry when we are actually saving and creating wealth as we buy gold? This has to do with simple trade economics. Like you'd know, when a country's value of imports exceeds value of its exports there is a current account deficit. Widening deficit is a worry for governments. Numbers tell us that gold imports have played not a small role in widening India's current account deficit in the recent past.
The situation worsens when rupee depreciates, sending its value south. Imports become more expensive for us and contribute to higher deficit. This is what we are witnessing at the moment. The government gets burdened with debt. We are collectively responsible for this.
The way out
We do not suggest you totally boycott gold as investment. Gold should be part of everyone's investments since it is one of the assets that cannot be avoided in order to tide over inflation in the longer term. However look for ways of holding gold apart from jewelry and coins. From investment point of view gold ETFs and gold mutual funds offer way better results than gold coins or jewelry does. You would be convinced of this if you read our article 'There are Better Ways of Investing in Gold Instead of Jewelry or Coins'. Buy only so much gold jewelry as you intend to wear and forget about gold coins.