Our love for gold knows no bounds. Since time immemorial gold has found various uses in varying forms of currencies. For more than 5000 years this metal has been in circulation as currencies, investment and as ornaments. It’s this very metal that changed the course of history in Central and South America. This metal was the reason for many wars, countless invasions, and yet the prominence of this metal continues to be in the ascendancy.
Back in 1944, the Bretton Woods agreement kickstarted the movement from gold standard to dollar as the global currency. Till then in gold standard, every currency was pegged to a specific amount of gold. The world moved to dollar as the main currency once Gold Standard was ditched. Interestingly, the currency is still pegged to dollar using gold reserves as collateral to an extent. Even now every country holds some part of their reserves as gold to protect the currency.
Production and Demand of Gold
From the above table it’s visible that the gold production is not even growing at 1%. Even though mining is improving, recycling of gold is declining.
Ever since the economic crisis of 2008, countries are increasing their gold deposits to hedge against future currency fluctuations, with demand increasing at a 30% CAGR since 2010. Interesting however has been the lower growth in jewellery demand, which is nearly 50% of the total demand of gold. With the demand only growing at 1.5%, this might point towards a change in the consumption pattern. Surprisingly, gold is not seen as a long-term investment in ETF and similar products. Looking at the data for ETFs over the past 9 years, it is visible that there’s no discernible pattern with standard deviation being very high. And gold bar and coin demand is declining with over a percentage of decline every year.
How does India view Gold
Gold has reached a whole new level when it comes to sentiment in India. From the time a baby is born, gold is a constant companion throughout their lives. As a savings-oriented economy, we trust only 2 commodities, real estate and gold, as investment grade. We even have festivals just to facilitate purchase of gold.
Even though gold jewellery tops the demand scenario for Indians currently, it’s not entirely a consumeristic product. Indian households account for 1.2 trillion dollar worth of physical gold of the total 7.2 trillion dollar worth of gold in physical form. That’s near 40% of Indian GDP in physical gold or 3 times the gold reserves of the US.
Performance of Gold Investments
Looking at the gold prices, one can infer that in rupee terms gold is trading near all time high valuations in India. In the last 55 years gold has appreciated at a CAGR of over 12%, probably showing how much of a strong footing the yellow metal has in India. One can see that between 2009 and 2013 gold prices doubled. But during the same period NIFTY went from 5200 to 6300, a 21% appreciation. Considering the fact currency considerably declined in the same period for India (a 32% decline, peaking at 42% decline at one point), gold performed over every investment option in the country.
Now consider the performance of gold during 2013 and 2018. Between 2013 and 2018, gold went up by only 6.2% in absolute terms. During that period our currency was also considerably stable, with Nifty moving over 71% in absolute terms. Equities blew every investment option out of the water during that period. Economy was booming and gold came to face the brunt of it to an extent. Various gold schemes launched during this period failed to enthuse the market. All prominent jewelers from Tanishq to Joyalukkas boarded the gold schemes wagon. Schemes launched by jewelers continued to find warm reception though.
Winds of change in perception?
Since 2015 India’s gold import has actually fallen. And to top off, the custom duty on gold was increased by 2.5% recently, making the current duty 12.5%. One of India’s prominent exports is jewellery, which requires gold as base material. But an increase in duty for raw material and a GST of 3% had cut the demand for gold outside India.
In India even though people buy jewellery a lot, it mainly works as an investment tool. From the day of purchase to the time of inheritance of the next generation, most jewellery sees the four walls of the locker more than the hand of the owner. But it’s among the very few investments Indians trust. A lot of Indian consumption happens at the lowest strata, the agriculture-based populace. These are the people who would buy gold which would serve not only as an indulgence, but also as a collateral in future for working capital. A lot of NBFC’s actually thrive on these models.
Gold as Investment – Story So Far
So, how does jewelry serve to be an investment? In the most pointless. Jewelry as an investment has an upkeep cost, insurance cost and manufacturing cost associated with. Not to mention the old designs losing sheen as time passes. Buying jewelry which one would wear under 10 times in a lifetime is a very bad investment.
But buying gold ETF can be viewed as a sensible risk-free investment. This assures liquidity coupled with no upkeep or insurance costs. This also brings the added advantage of lower price compared to jewelry. One can see that even jewellery based NBFCs like Muthoot and Manappuram are also moving towards diversified loan books. Millennials are ambivalent towards the yellow metal making the future demand a question.
Gold will always become the flavour when the economic tide inevitably turns. For example, during CY2019, the yellow metal appreciated almost 30% due to uncertainties in the economy, currency etc. Given how the gold reserves are on a rise for most countries, the demand is not expected to slow. Every country considers T-Bills and gold as risk-free investments. Moving towards ETF can also help reduce the import bills for the country. Our love for gold will never cede, but let’s hope to move towards modern forms of investment for future.
Source : Data on demand and supply – World Gold Council, Data on Gold prices – Investing.com