Gold has always been especially golden for people in India and Pakistan. But the former, with its population of more than one billion people has a very strong influence of its gold addiction on the global gold market and also on its own national economy.
Globally, India is the largest importer and consumer of the precious metal, and therefore, any changes in buying patterns or gold demand influences the luster of this safe haven investment for investors all around the world.
At home, however, Indians insatiable appetite for gold means the countrys external account suffers a lot. "Indias current account deficit hit a worrying 5.4 percent of gross domestic product in the three months to September, and in some months gold imports accounted for half the gap," said an article in the Financial Times earlier this week.
The reasons for this gold affinity are the same in the country as all over the world - the metals safe-haven appeal. However, besides this, Indians also love to indulge in precious gold jewelry because of a traditional liking for it - often called compulsive gold buying.
Besides the external account problem, hoarding of physical gold has also led to huge non-bank borrowing by so-called financial companies which lend money against gold as collateral.
In order to curb this never-ending desire for having as much gold as possible, the Reserve Bank of India (RBI) has suggested some means of curtailing demand. One of these is increasing the import duty on gold, which could also provide some fiscal relief to the government through additional revenues. Merely imposing taxes on gold trade will only provide impetus to the black market for the metal - something which the Indian government obviously wouldn want.
Another suggestion is to reduce golds appeal for investment purposes by providing other non-gold financial investments for the populace. However, the Indian rupees devaluation against the dollar has meant gold continues to be a great investment option against rupee-denominated investment products.
Besides these two, better utilisation of Indias existing gold reserves, without having the need to depend on external sources to meet local demand, can also be a workable strategy.
However, it is believed that market factors instead of measures by the RBI will lead to some abatement of Indian gold demand, such as a strengthening Indian rupee, or a global event that suppresses the metals appeal.
Having said that Indians desire for gold is quite resilient. "Even a six percent premium over the international price is not going to reduce Indians basic desire to hoard the metal," says Philip Klapwijk, of Thomson Reuters GFMS, a leading precious metals consultancy. Looks like it will be hard fighting the forces of tradition and compulsion when it comes to gold buying in India.
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