All That Glitters Is Not Gold

By | March 2, 2016

All that glitters is not goldDesign Credit: BankBazaar

India is commonly referred to as a sub-continent and rightfully so. India has not just a varied geography but a varied demography as well. India is made up of a vast variety of people from all walks of life. While Indian religions, cultures, social ceremonies and auspicious days vary from one ethnic group to another, the one thing that remains constant is our infatuation with gold.

For a long time gold has been a revered metal. From adorning idols in temples to the many myths surrounding kings and their thrones, gold is viewed as the most precious metal in Indian culture. Not only does it have financial implications but cultural ones as well. For as far back as one can remember, our culture has been deeply entwined with the use of gold and this precious metal is often seen as a symbol of purity and used in various ceremonies.

Demand for the Yellow Metal in India

With the country having the second largest population in the world crossing well over a billion people, we are the second largest consumer of gold, following China. Gold is seen as a very viable form of investment. It is seen as an effective hedge against inflation and is an instrument that increases in value over time. For the longest time, this proved to be true. If you think about it, people who purchased gold in the eighties will have seen a marked increase in its value.

Latest global trends that are dimming this glittery, precious metal

But of late gold has been starting to be seen as a metal that’s slowly losing its lustre. Several Global factors are a prime cause for this and in fact, there are a myriad of factors that can either push the price up or pull it down. Taking into account the past few months, it is evident that gold is no longer as safe a bet as was once considered to be.

  • The US Federal Reserve for the first time in almost a decade plans to increase interest rates. Though this announcement saw gold prices inch higher, it is expected that when the first set of interest rates are hiked in March, gold will see a drastic drop. This is because when interest rates rise, gold will lose its value as an effective investment and people are likely to invest more in equities that will fetch them higher returns. This is basic human nature. People want that which offers them more. But this may not be terrible news for India. People in India are still very price sensitive. It is for this very reason that many manufacturers see their best sales happen when prices are reasonable. The lowered price will result in people grabbing up gold but even this slight increase in demand won’t be able to sustain the price and the gold price is expected to drop further, leading to a negative return on the investment.
  • Foreign relations as tricky as they may be, have a profound effect on gold. The latest dip in gold prices was for a combination of economic and political reasons. The fallout of diplomatic relations between Iran and Saudi Arabia over the execution of a Shi’ite Cleric by the latter saw quite a dip in prices and further tensions arising in the Middle East may drag the prices still lower. Silver, on the other hand, has somehow maintained a good price even without cues from the international market.

Reaction of Indian consumers to the dipping Gold prices

Indians may find the dip in the rate of gold, a welcome thought. It means more gold can be bought and although this may lead to personal gratification, investing solely in gold may not be the smartest thing to do. Further dips will cancel out any returns expected and the most practical way to go about investing is to spread your financial portfolio and thereby minimize risk. Equities are poised to do well with the upcoming hikes and it is a good time to include them in your portfolio.

Gold is still considered as the end all symbol of wealth in India and our love story with gold may be an endearing never-ending one but putting all your eggs in one basket, often defeats the very purpose of investing.

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