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India's family structure can explain the appeal of gold as an investment class.

By Finserv MARKETS - Aug 1,2019
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India's family structure can explain the appeal of gold as an investment class.

According to Peter L. Bernstein (financial historian and economist), “They all had gold, but the gold had them all”. Almost no Indian ever said that they possessed enough gold. It’s indestructible, fungible and beautiful. And for Indians, whether it’s 18, 22 or 24-carat, gold is semi-sacred. India is one of the largest markets for gold, and growing affluence is driving the growth in demand.

Why are we so utterly fascinated by something that has little utilitarian value as a commodity? The old Bollywood classic ‘Mother India’ tells the story of how gold redeems the family’s honour. The heroine in this 1957 melodrama is reduced to pawning her gold bangles with the cunning village money lender to save the family farm. Music swelling, she slips off her jewels but never let’s go her dignity. This also validates an observation that an Indian economist, Dr. I.G. Patel, had made more than half a century ago, in 1958: “In prosperity as in the hour of need, the thoughts of most Indians turn to gold.”

One could even say that Indians possess a heart of gold. Every Indian heart deep down inside values gold for more than one reason and invest their hard earned money on physical assets like real estate and gold rather than financial assets. In fact, as per the All India Debt and Investment Survey1, the average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold and the rest 5% in financial assets.

  • All that glitters is gold?

According to the RBI report on Indian Household Finances, even the poorest of the population keeps its wealth in the form of gold. The report shows how 11% of all family wealth goes into buying the yellow metal and 8% of total liabilities in Indian families are in gold loans.

As depicted in graph 1, the largest determinant of gold holdings is risk aversion, i.e. the perceived role of gold as a safe asset. People avoid financial assets such as mutual funds, stating: ‘I feel it is too risky and I’ll eventually lose money,’ and appear to view gold as a relatively ‘safe’ asset. Moreover, households appear to feel less control over financial assets which impose barriers to immediate access, such as the need to maintain minimum balances and tight restrictions on the number of withdrawals. This can be contrasted with the feeling of immediacy and tangibility that gold reassuringly provides.

Graph 1- Determinants of financial market participation: Gold Holdings

India's family structure can explain the appeal of gold as an investment class
Overall, it appears that the large reliance on gold is not necessarily driven solely by a lack of education or financial literacy, but more by perceptions of risk and return.

  • Gold Demand Drivers in Indian Families:

For consumers, gold is a prized asset, cherished as both an adornment and an investment. It is equally viewed as a safe, secure investment; a unique way to preserve their wealth.

Table 1- Rationale behind gold purchases in India:

India's family structure can explain the appeal of gold as an investment class
India has an ambivalent relationship with gold. As shown in table 1, the consumption of gold has always been greatly intertwined with the Indian households’ financial planning goals. Bought as bullion or as jewellery, for either personal consumption or as investment or as even a gift, this glittering metal invariably exists in every household’s financial portfolio.

  • Why invest in Gold?

Investing money in gold is worth it because it works as a hedge against inflation. Over a period of time, the return on gold investment is in line with the rate of inflation. Women and families often think of gold jewellery as an economic substitute to money. Even now, gold has not lost its glitter amongst different investment options, like stocks, bonds, mutual funds and real estate, just to name a few. Historically, gold offered perfect hedge and stability since it had an inverse relationship to equity investments. Some reasons, such as religious connotations, family heirloom, gold gifts and status symbol, have propelled gold to a pedestal in India, a spot which it is likely to hold on to for a long time.

Gold has been regarded as one of the safest investments, a sentiment which Indians live by. Owning digital gold, available on Finserv MARKETS, would be considered to be an extremely smart choice. With gold prices fluctuating every day, it makes sense to visit the Finserv MARKETS website for detailed information and invest in digital gold for a secure future.

Among other benefits, digital gold, available on Finserv MARKETS, provides you with uncapped purchase limit, transparency, no documentation and authentic gold at your beck and call. Finserv MARKETS facilitates buying, selling and delivery of physical gold – all at the click of a button, without having to worry about the quality, purity and safety of your valuable digital gold. Maybe not everything that glitters might be gold, but for Indians digital gold could very well be their knight in shining armour!


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