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Gold holds a multifaceted significance for Indian investors. Some view it as a safe investment, while others cherish it for adornment. Its appeal grows during volatile market conditions, with investors often accumulating it during economic downturns. Seen as a strategic asset, gold plays a fundamental role in Indian investment portfolios.
Historically, gold has been integral to Indian culture and wealth. Its intrinsic qualities and scarcity make it unique and essential for Indian investors. Unlike other metals, gold doesn't corrode and can be easily melted and fashioned into jewellery. This made it valuable for trade and adornment since ancient times. The Indus Valley civilization, dating back 4000 years, used gold jewellery, and the metal features prominently in Hindu epics like the Ramayana and Mahabharata. Gold coins were widely issued during the Gupta dynasty around 250 AD, a period known as the Golden Age.
In 1962, post the India-China war, India faced depleted foreign reserves. Under the finance ministry of Morarji Desai, an Act was formed to revive the precious foreign exchange reserves. The government of India established Gold Control Act to mandate the conversion of private gold bullion into jewellery and restricted gold trading. This ban heightened gold's value, making India a net importer of the metal. Today, gold remains significant, with central banks holding 34,000 tonnes globally, the third-largest reserve asset.
Why Gold is Essential in Indian Portfolios:
- Hedge against Uncertainty: Gold mitigates political and economic uncertainties, acting as a hedge against rising inflation and fraudulent businesses. During economic collapses, gold serves as a liquid asset with no credit risk, appreciating in value as the rupee depreciates.
- Long-term Returns: As national wealth increases, so does the demand for gold, both as an investment and in physical form. This correlation between economic development and gold demand enhances its long-term value.
- Portfolio Diversification: Investors use gold to diversify portfolios. Unlike stocks, gold remains stable during economic downturns, offering a safe asset class despite its lower growth potential compared to stock indices and commodities.
- Comparative Returns: Over the past decade (2013-2023), gold investors have seen substantial returns. The BSE Sensex appreciated by 115%, while gold yielded 120% returns. Despite occasional negative returns, gold has consistently delivered positive outcomes.
2024 Gold Investment Trends:
As of 2024, gold continues to be a pivotal asset for Indian investors. Analysts recommend allocating 10-15% of an investment portfolio to gold, reflecting its enduring stability amidst global economic uncertainties. While physical gold remains popular for cultural reasons, there's a growing shift towards digital gold investments, including Gold ETFs, gold coins, bars, and Sovereign Gold Bonds. These instruments offer the benefits of liquidity and ease of transaction without the downsides of physical storage and making charges.
In 2024, gold has provided impressive returns, appreciating by 12% in the first half of the year alone. This performance is bolstered by ongoing geopolitical tensions and inflationary pressures, which have driven investors toward gold as a safe haven.
To further encourage gold investments, the Indian government the government has slashed custom duties on gold from 15% to 6% in July’24 budget which would lead to lower input costs, slash gold smuggling, stimulate domestic manufacturing and boost export competitiveness, reduce the import bill, and make gold more affordable for investors and jewellers. The move is expected to boost the domestic gold market and provide additional support to the economy. However, the government has also reduced the issue of sovereign gold bonds by 38% lately as giving out the attractive returns of 13-14% per annum to the investors in gold asset class was pinching government pockets.
Economic Impact:
Gold imports significantly impact India's economy, second only to oil imports. Rising gold purchases inflate the import bill, widening the current account deficit and depreciating the rupee. This depreciation makes key imports expensive, further driving up gold prices.
Current Drivers:
In 2024, several factors continue to drive gold prices. Persistent geopolitical tensions, inflation concerns, market volatility and expectations of US interest rate cut have made gold a preferred safe haven. Additionally, the global shift towards sustainable and ethical investing has increased demand for gold sourced responsibly. The ongoing digital transformation in the financial sector has also made it easier for investors to buy and trade gold electronically.
Final Thoughts:
Gold's liquidity, whether in ETFs, bars, or coins, provides flexibility to individuals, institutional investors, and central banks, as it can be quickly realized in times of need. This, coupled with its historical significance and intrinsic value, solidifies gold's fundamental role in Indian investment portfolios. As global economic conditions remain uncertain, gold is poised to maintain its importance for Indian investors, offering both stability and potential for growth.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.