GOLD INVESTMENT - ECONOMY

GOLD INVESTMENT - ECONOMY

NEWS: Gold investments in India surged by 60% in 2024, reaching $18 billion (approx Rs 1.5 lakh crore), compared to 2023, according to the World Gold Council (WGC) report.

WHAT’S IN THE NEWS?

Key Highlights of the Report

• India’s gold investment demand reached 239 tonnes in 2024, marking the highest level since 2013.
• This figure represents a 29% increase compared to the 185 tonnes recorded in 2023.
• On a global scale, gold demand witnessed a 25% surge, rising from 945.5 tonnes in 2023 to a higher level in 2024.
• Analysts anticipate further expansion in gold investments, particularly through Gold Exchange-Traded Funds (ETFs) and mutual funds, as investors seek digital and diversified investment avenues.

Key Facts Related to Gold

Gold’s Role in India’s Economy

• Gold constitutes over 5% of India’s total imports, making it a significant component of the country’s trade and financial landscape.

Gold Reserves in India

• The largest gold reserves in India are located in Bihar (44%), followed by:

·         Rajasthan (25%)

·         Karnataka (21%)

·         West Bengal (3%)

·         Andhra Pradesh (3%)

·         Jharkhand (2%)

Gold Reserves in the World

• The largest gold-holding nations include:

·         United States of America

·         Germany

·         Italy

·         France

Reasons Behind the Surge in Gold Demand

1. Steady Rise in Gold Prices

• One of the primary drivers behind the surge in gold demand has been the consistent increase in gold prices throughout the year.
• As a traditional hedge against inflation and economic uncertainty, investors preferred gold to preserve wealth and minimize financial risks.

2. Cultural Demand for Gold

• India’s cultural affinity towards gold, especially during auspicious occasions such as weddings and festivals, led to a substantial rise in retail demand.
• Seasonal trends in gold purchases further contributed to the increasing sales volumes.

3. Changing Urban Buying Trends

• Metropolitan cities witnessed a significant rise in gold purchases, driven by increasing disposable income and evolving investment preferences.
• The rapid expansion of e-commerce platforms enabled investors to easily buy gold bars and coins online, with convenient and swift delivery options enhancing accessibility.

4. Weaker Performance of Other Asset Classes

• The domestic stock markets recorded average returns, leading investors to explore alternative investment options.
• Many investors diverted funds from equities to gold due to its perceived stability and long-term value preservation.

Implications for the Indian Economy

1. Impact on the Current Account Deficit (CAD)

• Since India imports a significant portion of its gold, higher gold imports contribute to widening the Current Account Deficit (CAD), affecting the country’s foreign exchange reserves.

2. Inflationary Pressures

• An increase in gold demand can lead to a rise in gold prices, which, in turn, fuels inflationary pressures in the economy.
• Higher gold prices impact consumer spending, potentially affecting overall economic stability.

3. Disruptions in Financial Markets

• As investment shifts from equities to gold, liquidity in the stock markets may decline, leading to reduced capital availability for businesses.
• This can affect stock market performance and slow down economic growth.

Way Ahead: Measures to Manage Gold Demand

1. Strengthening Gold Monetization Schemes (GMS)

• The government can encourage gold deposits in banks, reducing reliance on gold imports and channeling domestic gold holdings into the financial system.

2. Expansion of Gold ETFs and Mutual Funds

• Promoting Gold Exchange-Traded Funds (ETFs) and gold-backed mutual funds by offering tax incentives can drive digital gold investments and reduce physical gold hoarding.

3. Development of E-Gold Infrastructure

• Fintech platforms can be leveraged to expand the accessibility of digital gold investments, ensuring wider participation from retail and institutional investors.
• Strengthening transparency and security in e-gold transactions can further boost investor confidence.

The World Gold Council (WGC)

The World Gold Council (WGC) is an international trade association representing the global gold industry.

• It was established in 1987 by some of the world’s leading gold mining companies to advance market development and promote gold investment.

 Governance Structure

• The WGC is governed by a Board of Directors, consisting of representatives from its member companies, usually the Chairperson or Chief Executive Officer (CEO).
• The Chief Executive Officer of the WGC also plays a key role in decision-making and policy implementation.

Membership & Presence

• The WGC has 32 member companies that contribute to its initiatives.
• The organization has global offices in key financial hubs, including:

·         London (Headquarters)

·         India

·         China

·         Singapore

·         United Arab Emirates (UAE)

·         United States

The Status of the Gold Industry in India

• Gold Reserves in India:
  
  

·         As per National Mineral Inventory, total reserves/resources of gold ore in India estimated at 501.83 million tonnes as of 2015.

·         Largest resources of gold ore are located in Bihar (44%), followed by Rajasthan (25%), Karnataka (21%), West Bengal (3%), Andhra Pradesh (3%), Jharkhand (2%).

• Karnataka commands around 80% of the nation's total gold output. The Kolar Gold Fields (KGF) in the Kolar district is one of the world's oldеst and deepest gold minеs.
• India Gold Import:

·         India is the world's second-largest gold consumer. India's gold imports increased by 30% in 2023-24, reaching USD 45.54 billion.

·         However, there was a significant decline of 53.56% in gold imports observed in March 2024.

What is the Sovereign Gold Bond Scheme?

• Launch: 

·         The SGB scheme was introduced in November 2015 with the aim of decreasing the demand for physical gold and redirecting a portion of domestic savings, which would otherwise be used to buy gold, into financial savings.

• Issuance: 

·         The Gold Bonds are issued as Government of India Stock under the Government Securities (GS) Act, 2006. 

·         These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. 

·         They are available for purchase through Scheduled Commercial banks (except Small Finance Banks, Payment Banks and Regional Rural Banks), Stock Holding Corporation of India Limited, Clearing Corporation of India Limited, designated post offices and National Stock Exchange of India Limited and Bombay Stock Exchange Limited, either directly or through agents.

• Eligibility: 

·         The bonds are available for purchase by resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.

• Features:

·         Issue Price: The price of gold bonds is linked to the price of gold of 999 purity (24 carats) as published by the India Bullion and Jewellers Association (IBJA), Mumbai.

·         Investment Limit: Gold bonds can be bought in multiples of one unit (1 gram), up to specific limits for different investors.

• Retail (individual) investors and Hindu Undivided Family (HUF) have a maximum limit of 4 kilograms (4,000 units) per financial year, while trusts and similar entities have a limit of 20 kilograms per financial year. The minimum investment permitted is 1 gram of gold.

·         Term: Gold bonds have a maturity period of eight years, with the option to exit the investment after the first five years.

·         Interest Rate: The scheme offers a fixed annual interest rate of 2.5%, payable semi-annually. The interest earned on Gold Bonds is taxable according to the Income Tax Act, 1961.

• Benefit: 

·         SGBs can be used as collateral for loans. 

·         Capital gains tax on redemption of SGB for individuals has been exempted. 

• Redemption refers to the issuer repurchasing a bond at or before maturity. 
• Capital gain is the profit earned when the selling price of an asset, such as stocks, bonds, or real estate, exceeds its purchase price.
• Disadvantages of Investing in SGB: 

·         This is a long-term investment, unlike physical gold, which can be sold immediately. 

·         Although SGBs are listed on exchanges, the trading volumes are relatively low, making it challenging to exit before maturity

Source: https://ddnews.gov.in/en/indias-gold-investments-surge-60-to-rs-1-5-lakh-crore-in-2024-report/