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WGC releases 'India Gold Series - Gold Investment Market and Financialisation'

17 july 2023

The World Gold Council has released the last chapter of their India Gold Market Series, titled ‘Gold Investment Market and Financialisation’. This series aims to assist the growth of India's gold industry by providing valuable data and insights that can contribute to the formulation of effective policies.

Gold Investment Market and Financialisation focuses on the following topics, as per the press release from the Council:

India's Gold Market Potential: Evolving Landscape & Financial Inclusion

India, recognised as one of the world's largest gold bar and coin markets, possesses a thriving investment demand for gold. The allure of gold lies in its safe-haven appeal and the flexibility to convert it into jewellery at a later stage.

The landscape of the gold market is evolving due to various factors, including the government's efforts to ‘bank the unbanked’, increased usage of banking services, and heightened awareness of financial products. These factors have the potential to impact future demand for gold bars and coins.

India's Gold Investment Landscape: Shifting Demographics and Cultural Significance

Demographic shifts and financial inclusion are reshaping the gold investment landscape in India. As the second-largest bar and coin market globally, gold holds immense cultural significance, serving as a household investment asset and a symbol of celebration during weddings and festivals. While access to banking facilities has historically been limited, particularly in rural areas, a younger generation that prioritizes technology, luxury goods, and travel is emerging.

Mobilizing India's Private Gold Stock: Revamped Gold Monetisation Scheme and the Path to Financialisation

The Indian government has undertaken significant steps to mobilize the substantial private stock of gold, estimated at around $1.4 trillion. Recently, the Revamped Gold Monetisation Scheme (GMS) was launched as part of this initiative, which has seen the gold loan market flourish with collateralised gold holdings ranging from 2,950 to 3,350 tons. To further enhance financialisation, spot gold exchanges need to develop gold-backed financial products that encourage broader participation in the gold market.

Rising Demand for Gold-backed Financial Products: Fuelling Growth in India's Digital Gold Market

Gold-backed financial products have gained traction in India. Despite a setback during the rise of the equity market, gold exchange-traded funds (ETFs) experienced a resurgence during the pandemic, with gold ETF holdings reaching 38 tons by the end of 2022. Ongoing geopolitical tensions have reinforced the demand for safe-haven assets, leading to the emergence of digital gold investment platforms. Currently, 16 companies offer digital gold products in India, catering to an estimated 5-6 million active gold accounts. Additionally, gold savings funds and multi-asset funds provide alternative avenues for investing in gold-backed ETFs, while sovereign gold bonds offer bonus interest payments.

India's Organized Loan Against Jewellery Market

Despite increased lender participation and favourable conditions, historically, the loan against jewellery market has been unorganized, with high interest rates. However, the past three years have witnessed a rise in the number of organized lenders, reaching 40% by the end of 2022, and a three-fold increase in loans arranged through banks. This shift towards organization, coupled with reduced paperwork and realistic interest rates, indicates a positive trend. The loan against jewellery market, is now valued between 2,950 and 3,350 tons.

Unleashing the Potential: Financialisation and Economic Growth through Gold in India

Looking ahead, the success of the GMS will be crucial in effectively mobilizing India's household gold savings and reducing import dependency. Increased participation in GMS is seen as a long-term solution to mitigate the impact of rising import duties on India's Current Account Deficit (CAD). The growing presence of organized players in the gold market is a positive development for financial inclusion, as it expands access to credit for a large segment of the population. While the banking sector's penetration may pose challenges to the loan against jewellery industry, loans backed by gold will remain preferable due to lower credit risk.

India's gold market holds tremendous potential for financialisation. With the right initiatives, including the development of gold-backed financial products and the continued success of the Gold Monetisation Scheme (GMS), the country can tap into its vast gold reserves, drive economic growth, and enhance financial inclusion.

Somasundaram PR, Regional CEO, India, World Gold Council said: "The quantum of gold held by Indian households, accumulated over centuries, has potential to play a significant economic role in a new growing India. Even as traditional demand drivers seem to face headwinds due to demographic shifts, digital thrust to financial inclusion, changing role of women in society and stronger tax compliance,  gold is resilient due to its multiple traits addressing many social and economic needs. The manner in which India has woven gold in its milieu speaks a lot about practical household wisdom, which can be equally tapped for financialising vast stocks of gold in the emerging economic context.

Gold itself, amidst the turmoil of the pandemic, has reinforced its role as a reliable, high performing asset class in times of crisis and this is bound to provide opportunities to use gold to increase overall risk appetite in the economy. Development of gold-backed financial products and fintech gold, all of which provide institutional pooling of gold as an alternative to household custody,  should be promoted vigorously as part of overall gold monetisation framework. Exchange trading mechanism and bold tax incentives to promote transparency in buying are fundamental to a more organised recycling market that underpins gold monetisation. The investment side of gold overall looks promising over the next few years as India pushes ahead on formalising many such sectors."

Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough & Polished