Gold Rush
  • Demand for gold has been rising worldwide
  • gold prices in international market are calculated in US$. And these gold prices have doubled since 2008.
  • India has traditionally been a major absorber of world gold.
  • Gold has been a combination of investment tool and status symbol in India
  • Gold imports are positively correlated with inflation. (meaning, if inflation increases then gold imports will definitely increase.)
Why do people invest in gold?
  1. Share market is volatile (fluctuates a lot). And it doesn’t offer attractive return at the moment.
  2. To invest in share market / mutual funds, you need PAN CARD + DEMAT Account. Many people still don’t have it. = With limited access to financial instruments, financial markets, especially in the rural areas.
  3. Rural people don’t have awareness about Mutual funds, pension-provident funds etc.
  4. Inflation is high. So the profit (return) offered on back savings, fixed deposits, pension-insurance funds = not attractive.
  5. When you combine these factors: most people prefer to invest in gold / silver.
Thus, rising demand for gold is only a “symptom” of more fundamental problems in the economy (inflation, lack of financial awareness etc.)
  • Anyways, what’s the big deal? let the people invest in gold, after all its their money!
  • The big deal is, if people had invested money in banking / finance sector, then that money could be given to some needy businessmen, he’ll open / expand his factory = more employment + more production =good for economy.
  • But if people just purchase gold/ silver = that money stops moving. It just sits in their locker = bad for economy.
Another problem => gold rush = high CAD.
Gold -Current Account Deficit (CAD)
  • High CAD = bad, because it weakens the rupee.
  • There are two main villains responsible for India’s current account deficit: 1) gold import 2) crude oil import.
  • Given the energy requirements, we cannot stop / reduce the crude oil import, else it’ll badly affect economy.
  • Then solution is obviously: reduce gold import. But how?
How to stop gold rush?
  • One solution = increase duty on gold import. But problem is people will start smuggling. Then Government will not get any import duty at all.
  • Therefore, Economy survey suggests following things:
  1. Underlying motive for gold rush = high inflation. So first, Government should curb the inflation.
  2. Second problem is lack of financial instruments available to the average citizen, especially in the rural areas. (they don’t have PAN card, DEMAT account or knowledge  of how to invest in sharemarket/ mutual funds etc.). So Government should take initiatives to increase the financial awareness, financial inclusion.
  3. Government should introduce inflation indexed bonds. (then it is more attractive to invest in bonds, otherwise 9% return is not good, if there is 11% inflation!)
Inflation indexed bonds
  • Normal “bonds” work in this fashion: 10%, 2017
  • Meaning you give me Rs.100 right now. I’ll pay you Rs.10 as interest every year until 2017 and then I’ll return the principle (Rs.100).
  • Ok but what if there get so high inflation in 2017 that even cheapest ballpoint pen costs Rs.500! Then getting back the Rs.100 principle hardly benefits you. Because of this reason, nowadays people prefer to invest in gold rather than in shares/ bonds/ mutual funds etc.
  • But in “inflation indexed bonds”, the principle is linked with Inflation index. So, if from 2013 to 2017, inflation increased by 30% then you get 30% more principle (=100 original + 30) =Rs.130. this is good because your investment is protected from inflation.


    Submitted by Gagandeep Singh Karwar PGDM 12-14 ,
    IILM CLAIRVOYANCE (blog of IILM GSM)