Why India’s Love Affair With Gold Is Here To Stay

India is among the top two gold importers every year. Come Diwali, the precious metal is high on the buying list of every household. But that may not have been a smart investment decision, at least over the last five years, data show.

Anyone who bought bullion last Diwali would have gained nothing, with prices remaining flat. Investing in a bank fixed deposit – considered as safe as gold – would have earned 7.5-8.5 percent returns. That’s an opportunity lost for a gold buyer.

What's worse, if you bought gold five years ago on Diwali, you would still be sitting on a nominal loss. The return on stock investments would have doubled during the period. Imagine the number of gold coins doubling in your vault.

Indians don’t really care for price appreciation, according to Sandeep Kulhalli, senior vice-president, retail and marketing, at the jewellery division at Titan. “Thankfully, customers in India buy jewellery and not bullion. Our customers are largely women who don’t think of annual returns,” Kulhalli said on BloombergQuint’s special show ‘All That Glitters’.

Global gold traders don’t expect gold to turn into a wealth creator anytime soon as it did between 2002 and 2012, when the yellow metal’s value multiplied six times. Mark To, head of research at Wing Fung Financial Group believes the real reason for the underperformance is global monetary tightening. Barring temporary phases of geopolitical uncertainty, gold will remain range-bound, he said.

For Indians, buying gold is also a bet on the rupee. Indians who bought gold till 2012 didn’t suffer the kind of pain that a US citizen would have seen, said Chintan Haria, fund manager at ICICI Prudential Asset Management Company.

Global gold prices crashed almost 50 percent between 2012 and 2015. But Indian gold prices never fell more than 25 percent from the top due to rupee depreciation. 

Chintan Haria, Fund Manager, ICICI Prudential AMC 

Haria expects the rupee to continue depreciating over time as it is overvalued on a real effective exchange rate basis. (REER compares relative value of a currency against key trading partners.) To that extent, gold will continue to act as a hedge against inflation and any ‘black swan’ event like the US financial crisis. So while the short-term pain is not over yet, the yellow metal will continue to glitter in the long run.

(This article was first published in BloombergQuint)

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