The New Gold Rush

FOR SOME TIME NOW, Kerala has been witnessing a phenomenon that could be right out of thriller movies. The state has always had a fascination with gold. Because many Malayalees have for decades been going to work in the Middle East, this hunger has been kept fed. Families brought in permissi­ble amounts, sometimes sneaking in a little extra while coming on holidays. And then there were the organised smugglers. But lately, in recent years, another feature was added to this mix—gangs of localites who would hijack the vehicles of these smugglers and rob them of their gold. In this enterprise, many had parts—from Customs officials who would allow the smugglers to pass through even when they knew there was gold, to the police who would guide the hijackers, to the politicians who got a cut of it. All this indicating yet again that human beings can go to elaborate lengths for the metal. This is especially true when its value goes up, and in 2024 that has been spectacular.

On Wednesday, October 23, gold prices crossed `80,000 per 10kg. This is for the first time ever in its history. Just this year, prices have increased by almost 25 per cent. While there may be a concatenation of reasons, what underpins them is that when human beings or societies face uncertainties, then they instinctively turn to gold as a measure of economic security. For instance, there are major conflicts in the world. The invasion of Ukraine by Russia led to the Western powers railing on the side of the former. Sanc­tions were imposed on Russia which meant that it could not use US dollars, the reserve currency for international transactions. That led to other coun­tries rethinking their dependency on the dollar. The foil against it is gold, a historical medium of exchange. Central banks of many nations began to buy gold and increase their reserves. The conflict in the Middle East of Israel with Lebanon and Iran has also made the world nervous, again leading to gold demand. In Beirut, Israeli soldiers found a bunker under a hospital where $500 million of gold and cash had been kept. India itself has been steadily increasing its gold reserves. When the current RBI Governor Shaktikanta Das took charge in 2018, RBI had $21 billion of gold, which has now tripled to around $65 billion.

Consumer demand for gold has also seen movement. The period around Diwali is when there is a lot of buying of gold in the country. However, if gold prices shoot up, then it can have an effect on how much individuals would be able to afford. Earlier this year in the Union Budget, the government had cut Customs duty on the import of gold by a whopping 9 per cent, from 16 per cent to 5 per cent. It should have lowered prices, but did not for long. Even now, as gold hits a record, demand for it among consumers has not dampened. The World Gold Council finds that with various festivals on the anvil and the wedding season beginning, there are signs of demand picking up after a brief lull. Its head of research wrote in an article on its website: “The surge in demand following the import duty cut, which coincided with some festivals, has been tempered by record-high prices. There is an expectation of increased demand from rural areas, driven by improvements in overall consumption. Favourable monsoons and higher crop sowing this year are anticipated to boost rural incomes, potentially leading to higher gold purchases. Investment demand for gold bars and coins remains strong, in part fuelled by the rise in gold prices and expectations of further increases. This trend is further enhanced by sales across online marketplaces, making gold more accessible.

Another impact of the demand could be seen in how much Indians were putting in gold in the form of Exchange Traded Funds (ETFs), where you invest in a fund that mirrors the price of gold. In the National Stock Exchange, the volumes traded in this asset class in 2024 were around `17,000 crore, more than double of last year. A Moneycontrol article said, “Even while corporates dominate holding the larger share in the AUM of gold ETFs, individual investors such as High Net Worth Individuals and retail investors have been making more and more in­vestments in gold ETFs in recent years. According to the Association of Mutual Funds in India (AMFI) data, over 8 lakh folios were added in gold ETFs, YTD.” It was a similar story for gold loans. It increased so much that RBI decided to be cautious and tightened the policies around lending.

Despite gold’s performance this year, there are no signs of any abate­ment in the near future. Geopolitical conditions continue to be as testy as ever. China, the biggest economic powerhouse in the world after the US, continues to increase its gold reserves. There is the uncertainty of the US presidential election and what it will throw up. Any instability after the results will once again reflect on gold demand. Interest rates are coming down, which means people will start looking for places other than banks, like gold, to get better returns. If gold prices increase, it is good news because rural India historically, and still exten­sively, relies on gold for their financial well-being. Increase in prices means that regular Indian households find themselves wealthier. Buying of gold during festivals like Diwali or for wed­dings is also a form of investment for them because gold has always stood the test of time in keeping pace with inflation. When it outdoes itself, as lately, those who own it, from house­wives to farmers, are happier. The appeal of gold is not just in its beauty but all the other ways in which it adds value to lives.

consumersdemandGold rushinvestmentreturnsWealth Issue 2024yellow metal