Gold investment market and financialisation: India gold market series

Retail investment in gold has suffered over recent years (Chart 2). Several factors account for this relatively subdued performance, notably: greater financial inclusion; the outperformance of gold by equities; new government regulations – such as high import duties and the clampdown on unaccounted money – and changing demographics. 

Over the last nine years the government’s focus on greater financial inclusion has enhanced the reach of banks across large parts of India. Much of this has been due to the introduction in 2014 of the Pradhan Mantri Jan Dhan Yojna (PMJDY), a scheme aimed at offering country-wide access to banking facilities. Over the past nine years over 482m bank accounts have been opened, more than in any decade of the country’s history.¹² Importantly, over 65% of these accounts are in rural and semi-urban communities.¹³ The spread of the banking network across rural India has been helped by the growing availability of affordable internet access, which has allowed banks to implement technology more efficiently in the country's interior. 
 

Households in lower and mid-income groups have traditionally considered gold a better form of investment than bank deposit accounts. But the changes mentioned above have had a tremendous impact on financial literacy and could create a rotation away from gold in favour of a range of other financial products (Focus 1). The rapid growth in internet penetration has also led to a surge in fintech players who provide easy access to financial services. This, combined with the strong performance of equities, has encouraged many investors to put their money into the stock market. Over the last decade, India’s benchmark equity index, the Nifty 50, has generated returns of 210%, compared to 180% for gold.¹⁴ Having said that, a large share of the upside for gold has occurred only recently; between 2013-2018 the gold price consolidated in a narrow range generating single-digit returns. Overall, mutual fund investor accounts have increased from 40mn in 2015 to 143mn in 2023.¹⁵ Demat accounts, used for direct equity trading, have also surged: from 24mn in 2015 to 108mn in 2022.¹⁶ Despite this move towards equities in recent years, in absolute terms household savings in stocks and mutual funds make up ~10% of total household gross financial savings.¹⁷ This suggests scope for significant penetration by equities if Indian stock markets continue to perform well. 

On the regulatory front, successive governments have tried to address the challenge of unaccounted money in order to reduce the country’s dependency on cash transactions. Cash purchases account for a meaningful share of gold transactions. But these have been affected by a series of government measures, from demonetisation to restrictions on cash purchases and mandate to provide PAN.¹⁸ And these have contributed to the decline in bar and coin demand in recent years.

India’s changing demographics are another important factor in retail gold purchases. India has a young population. Roughly 65% are below the age of 40 and they have savings habits that are often far removed from those of their parents.¹⁹ Aside from a preference for equities and new financial products (including structured products, digital gold and cryptocurrencies) the younger generation has a greater propensity to spend. It is therefore not surprising that India's savings rate has fallen from 33% to 30% over the last decade or so (Chart 3).²⁰ Although rising incomes should benefit gold purchases, gold will have to compete with other high-value consumer products, such as electronics and mobile phones. 
 

Drivers of gold investment demand 

Some of the factors supporting bar and coin demand are similar to those that support jewellery demand. Weddings and religious occasions are important. Economic factors also drive bar and coin demand both in the long and short term. In the long term, investment demand is determined by income. All else being equal, an econometric model using annual data from 1990 to 2021, shows that for a 1% increase in gross national income per capita, bar and coin demand increases by 1.1%.²¹  With rising income levels, the allocation of Indian household savings to financial assets – such as banking deposits, insurance funds and mutual funds – has increased compared to physical assets (real estate, gold) resulting in headwind  for retail investment demand (Chart 5). 
 

There are also short-term drivers of bar and coin demand. Our econometric model shows that keeping everything constant: 

• a 1% increase in inflation increases demand by 4%
• a 1% fall in the gold price increases bar and coin demand by 1%
• a 1% increase in excess rainfall increases demand by 0.7%
• import duty and other restrictive measures reduced demand by 1.7% during the period they were in force

There are other reasons why Indian investors have regarded gold as a preferred mode of investment, the most important being its role as a safe haven asset, diversifier and a hedge against inflation, plus the liquidity it offers in terms of ease of selling back and its use as security for a loan:

• Safe haven: The importance of gold as a safe haven is elemental, especially in rural India where there is a legacy of weak banking penetration and a low awareness of financial services.  
• Ease of converting into cash or its use for a loan: While many financial instruments can be quickly liquidated it normally takes 24-48 hours for funds to be credited. To secure a loan, gold represents the most straightforward collateral, especially for small loans that require minimal paperwork.
• Diversification: This driver is well understood given gold’s negative correlation to equities. Specifically, as it relates to investors in India, the return on gold in local currency terms has enabled it to act as a hedge against rupee depreciation. 
• Eventual conversion into jewellery: Almost unique to India, consumers buy gold for a marriage that they purchase initially in bar and/or coin form. This physical gold is acquired on a regular basis before eventually being exchanged for jewellery with the consumer paying (at a minimum) the making charge. 
• Hedge against inflation: The average annual return of 10% in rupee terms over the last four decades has often outpaced Indian consumer price inflation (CPI), which stands at 7.3% over the same period.²² 

Gold remains top of mind among Indian investors. When asked about where they would allocate an unexpected bonus, our 2019 consumer research study found that Indian investors would invest 30% of their bonus in gold (Chart 6). 

Investment motives for bar and coin remain different

While the gold investment market is still contending with structural changes, the objectives behind buying bars and coins are largely unchanged. Bars remain the preferred choice for investment, whereas coins tend to be used for gifts and other festive-related purchases. The size of the Indian gold bar market is roughly twice that of coins.   

In terms of composition, all bars are produced in 24-carat gold. Popular sizes for smaller investors include the Guinea (at 8g, 10g and 20g); larger weights, such as 50g and 100g, resonate with high-net-worth buyers. These are used either for investment or for converting into jewellery at a later date. Smaller sizes, including 2g and 5g, tend to be bought for gifting purposes.  Overall, the market is dominated by minted bars weighing 100g or less, with a share of around 90-95%²³ .

Coins are extremely popular during festive seasons, notably Diwali and Dhanteras and the auspicious day of Akshaya Tritiya, which explains why 30-40% of coin sales take place during these periods. Also produced in 24-carat gold, popular sizes include 2g, 5g and 10g. Most coins feature inscriptions of gods and goddesses, particularly images of the goddess Lakshmi and elephant-headed god Ganesha. Coins are also used for gifting purposes during special occasions, notably for the birth of a child or at weddings.  
 

Gold coin shopping in India

Jewellers are the favoured point of sale 

The vast majority of bar and coin sales take place in jewellery stores. This reflects the jewellers’ expertise and the esteem in which they are held by consumers. That said, over recent years there have been new developments, notably a growth in direct sales by gold refineries and an increasing use of online platforms. Many of the recently established refineries are now selling to consumers through retail stores and digital channels. E-commerce platforms have also made notable inroads into the market; Metals Focus estimates that some 3% of bars and coins are sold via sites such as Flipkart, Snapdeal and Amazon. Some 80-85% of offline sales of gold bars and coins are transacted through jewellers, with the balance bought direct from refineries.²⁴
 

Footnotes

¹¹In FY2020-21, 47% of Indian household savings were in physical assets

¹²PMJDY Progress Report , 22 February 2023

¹³PMJDY Progress Report , 22 February 2023

¹⁴Bloomberg data as of end 2022

¹⁵AMFI , January 2023

¹⁶SEBI Monthly Bulletin January 2023

¹⁷RBI Handbook of Statistics on Indian Economy 2021-22

¹⁸ Press Information Bureau circular, 15 December 2015

¹⁹World Bank

²⁰World Bank

²¹Prior to the 1990s, government regulation made gold imports illegal. This changed in 1992, resulting in a structural change in gold market dynamics. We concentrate on the period starting in the 1990s for three reasons: 1) to have a consistent model across the various demand categories; 2) to avoid difficulties modelling the structural shift; and 3) because econometric models use a series for which the pre-1990s data is available and seemingly reliable (e.g., jewellery) and delivers results consistent with those using post-1990 data.

²²Bloomberg, World Gold Council. Gold price return and average Inflation computed considering year-end domestic gold price and CPI inflation data between 1981 and 2022.

²³Metals Focus

²⁴Metals Focus