Despite Several Hurdles, Will Indians Keep Buying Gold?

India is the world’s largest consumer of gold. It is known for the elaborate gold ornamentation, religious offerings of gold at temples and gold-adorned brides at traditional Indian weddings.

But, we also hear that the government has recently come down strongly against importing gold… On top of this, with a stagnating economy and weak Rupee, will Indians continue to pour money into gold? Or, like the Western world, will they prefer to keep savings at the bank? Will they spend it on real-estate or consumer goods instead?

Jayant Bhandari emigrated from India at the age of 36, and has been a contributor to Liberty magazine and the Mises Institute. Jayant worked in natural resource investing for US Global Investors for 6 years, and once worked at Casey Research. He writes in from India with an update on gold.

At a recent wedding, my mom kept pointing out women who were wearing fake-gold jewelry. You might wonder if real gold is out of style, or whether Indians are just having trouble getting as much real gold as they want.

Can the government really stop gold imports here? I would think not – the Indian government is likely too corrupt and inefficient to properly enforce this kind of policy.

So, I believe it’s impossible for them to stop gold imports through custom duty and regulatory mechanisms. Traders tell me that most of the gold comes through smuggling anyway. Transactions worth millions are performed over cell-phones and closed using bags of cash.

In time, I expect smuggling will reduce the premiums that Indians currently pay. A small premium, possibly lower than the official premium, could take care of bribes, smugglers’ commissions and transactions costs, while saving money on the import duty which is not paid.

So Indians are still interested in gold, and will keep buying. Because of the high deficit and high inflation – the consumer price index is up 9.8% over the last 12 months — Indians have very few options. They cannot park their money abroad because of strict limitations on holding foreign currencies. The same applies to owning foreign properties and other investments. That’s why 33% of Indian GDP goes into physical assets, with two-thirds of the gross domestic savings going into real-estate and precious metals.

Property is already extremely over-priced. Also, I believe gold is the only investment that allows Indians to keep their money away from the prying eyes of the confiscatory government.

Gold has done well for Indians – it is currently trading near its all-time high in Rupee. For all these reasons, people still love gold.

So according to Jayant, Indians should still consume gold, though he also expressed concerns that demand could be threatened by as slowdown in the overall Indian economy. As he explained, India still suffers from poverty and stagnation brought on by extensive corruption. Because of gold smuggling, he also expects domestic premiums for physical gold sales to fall over time.