Indians have reacted to the latest gold prices falls by — buying more gold. And why not? Aside from Indians’ well known passion for the yellow metal (yours truly not excluded) gold has by and large served well as an investment: annual returns over the past five years have been around 17 percent, Morgan Stanley notes.
Now, gold’s near 20 percent plunge this year has wiped some $300 billion off Indians’ gold holdings, Morgan Stanley estimates in a note (households are believed to own about 15,000 metric tonnes of gold). So is the gold rush in India over?
Possibly. Indian gold imports have doubled to around 3 percent of GDP in the past five years. That rise is partly down to greater wealth which translates into more wedding jewellery purchases. But the more unpleasant side of the equation is India’s inflation problem. Look at the following charts from MS that shows how negative real interest rates have encouraged savings in gold rather than financial instruments:
Signs now are that inflation is ebbing — wholesale price growth in March slowed to the slowest in more than three years. The fall in oil and industrial metals prices, if sustained, should see this process continue. The government has also been slashing spending to bring its huge budget deficit under control. Morgan Stanley writes:
Over the past five years, real rates have been largely negative. The source of negative real rates has been the high fiscal deficit. Fiscal support is unwinding and real rates are turning up. This will cause gold appetite to recede.