Akshaya Tritiya, when many Indians consider it auspicious to buy gold, came this week at a time when prices of the precious metal were almost 10 per cent higher than what they were at the same time last year. Demand for gold is unpredictable at the moment — it is usually higher around Akshaya Tritiya — because of existing high prices, questionable rural demand and the possible effects of the cash crunch. Prices were over Rs 32,500 for 10 grammes. One common assumption about gold demand is that higher demand is a sign of increasing anxiety about macroeconomic stability. But, as the Reserve Bank of India (RBI) pointed out at the time of its first bimonthly monetary policy in 2018-19, recent gold import figures have seen a sharp reduction in the amount of the metal brought into the country.
However, when seen from a yearly perspective, gold imports increased considerably in the early part of the calendar year, albeit from a low base, as Neelkanth Mishra of Credit Suisse has pointed out on these pages. A combination of retail restocking and high rural demand pushed gold imports up by 67 per cent over calendar year 2017. Overall, in 2017-18, the gold import bill was estimated to rise by 13 per cent, to $34 billion. Returns in India were a percentage point higher than the global return of just above 6 per cent in 2017-18.
It is argued that an increase in imports of gold and precious gems should be viewed as a form of capital flight. Indeed, if gems have seen an unaccountable increase in demand lately, it could further be argued that they are being seen at the moment as an attractive alternative hedge to uncertainty than gold. The link between gold demand and macroeconomic uncertainty may, therefore, no longer be straightforward. Recent policy interventions, however, muddy the waters as far as future gold demand is concerned. The World Gold Council has argued that rules imposing transparency on purchases, including bringing the sector under the purview of the Prevention of Money Laundering Act, as well as the introduction of the goods and services tax or GST, may suppress demand for the metal during the coming year. Many analysts also expect that, as long as stock markets remain effervescent, gold demand will remain subdued.
The Union finance ministry has launched the first tranche of the government’s gold bonds for this financial year over the current week; it hopes for Rs 50 billion from its various gold schemes in the ongoing financial year, matching what it mopped up last year. The schemes have not matched the expectations with which they were launched in 2015, suggesting the truth of claims that the demand for gold in India reflects not just speculation on the metal’s returns but its ability to store value away from regulation or tax supervision. As such, the continuing efforts by the government to increase its supervision of the sector are both welcome and likely to hit demand going forward. It is also an open question how much take-up there will be of various “electronic” gold purchase schemes being run by mobile wallet providers such as Paytm.