Indian market has continued to rely on gold as a physical asset, with the drive to invest in them largely arising out of the consumer need to own jewelry
By Prathamesh Mallya
Indians’ love affair with gold goes beyond the usual perception of the yellow metal in other parts of the world, where it is seen widely as an investment option. For millennia, gold has held a special place in Indian families, as an auspicious and ornamental asset. This sentiment continues to dominate the buyers’ mindset to this day. The majority of people who purchase gold in India view it as an unsellable physical entity and they do so as a part of a tradition, instead of seeing it as an investment.
The average annual demand for gold in India oscillates anywhere between 800 to 1,000 tonnes per year. Moreover, the Coronavirus pandemic and the subsequent restrictions on travel imposed through the four-month lockdown have severely impacted the demand for physical gold assets. However, Indians can also pursue other non-physical investment options for gold, as an increasing number of young professionals now look to diversify their portfolios. As people are considering investments in all asset classes during the current economic downturn, gold offers several unique offerings.
In times of market volatility and economic uncertainty, gold markets have often remained the go-to for investors as they continue to perform well, while constantly bucking the inflationary trends. In the last decade alone, gold prices have appreciated whenever people scurried to invest in it as a safer bet during times of financial distress. From December’19 alone, we have witnessed a sharp rise in prices, with the current price for 10 grams of gold significant increase when reaching approximately INR 54,000,(CMP: MCX Gold Futures as on 28th July 2020 stands at 52477/10 gms) as compared to 2019’s high of INR 30,000. In the past few months alone, investors who went for investments in gold witnessed double-digit returns.
However, the Indian market has continued to rely on gold as a physical asset, with the drive to invest in them largely arising out of the consumer need to own jewelry. Out of any given annual demand for gold in the country, up to 60% of the consumption is driven by South India’s requirements alone, with the rest 40% coming from the remaining regions. In addition to this, more than 70% of the said purchases are made towards the making of jewelry. This demand in South India is integral and inherent to the culture, where family and festive occasions drive the rush for the precious metal, while simultaneously driving the prices up.
Gold investment options
The above developments notwithstanding, the need for investment in gold could be substituted by other means, allowing us choices beyond physical assets. People could consider investing in sovereign gold bonds, initiated by the Indian government as a viable substitute for physical gold.
Further to this, people can purchase gold in the form of e-gold, assisted by the burgeoning digital payment gateway financial ecosystem. Service providers such as Google Pay, Paytm, and Phone Pe, etc. are now offering alternatives where one gram of gold or more can be purchased based on a person’s need, thereby allowing greater flexibility. To address concerns over the reliability, these platforms are working with MMTC-PAMP, a public-sector undertaking gold refinery that ensures that your gold investments have the markings of a certified 999.9 24-Karat gold quality. On accumulating a certain quantity, say 8 to 10 grams, customers can even find it economical by choosing to receive the gold in physical form and have them delivered.
Global economic forecast and its implications
Recent International Monetary Fund growth forecasts indicate a contraction of 4.9% of the global economy. This could worsen if trade and internal market dynamics of respective major economies head into a tailspin. Developing laboratory approved vaccines for trials and arriving at a credible vaccine for mass production is a time-bound process riddled with uncertainty. Worryingly, recovery prospects can be muddled further, if the COVID-19 spread sees no end in sight.
The United States has been one of the worst COVID-19 affected countries in the world, with the numbers only increasing by the day. European countries such as Italy, Spain, and Germany are only now on the path to recovery, with an indeterminable economic trajectory for 2020. India and China are one of the world’s largest consumers and are also likely to witness significant economic contraction. Bleak outlook such as this warrants safe investments in gold asset classes, which can come in handy during the year 2020. It is therefore only prudent that foreign and retail investors make their resources move towards gold assets as the scenario favors gold markets.
In an ideal market scenario, the allocation of gold in any portfolio is usually 10%. Looking at the overall uncertainty, allocation in any asset class and especially gold could be increased to 15%. The first half of 2020 already witnessed gleaming returns on gold investments and the latter half is likely to perform on par or even better.
Recommendations for investments
SIPs with local Jewelers are often considered an option by retail investors, however, this could be a risky proposition. Whether or not people purchase physical gold, they must buy from bigger brands and reliable jewelers who can indicate BIS hallmarks, which indicate the gold standard and quality. Gold frauds are a menace, as local jewelers can pass off low-purity gold as 22Karat gold, devoid of the requisite quality markings. Further to this, the tech-savvy Indian consumer is usually familiar with the 22 Karat gold which is used for making jewelry. However, if he/she is pursuing an investment, it is preferable to go for 24 Karat gold instead, in the form of coins or bars. The markets indicate that we could see an additional increase in prices by at least 10 to 12% and the time is apt for investing in gold asset classes.
(Prathamesh Mallya is AVP – Research Non-Agri Commodities and Currencies at Angel Broking Ltd. The views expressed are the author’s own. Financial Express Online does not bear any responsibility for investment advice. Please consult your investment advisor before investing.)