Appreciates jewelry faster than inflation
Is gold really an investment or just a hedge against inflation?
Another answer to this question came to me as I started learning more about historical uses of gold, etc. Maybe it's a crazy idea, but I'll let it float anyway to see what you think.
Investing in gold is an indirect investment in the economy and GDP of the Indian nation. In that sense, it's just a hedge against inflation as long as the Indian economy is growing faster than your local inflation rate.
In fact, India currently consumes more than 1/3 of its gold production, mostly in the form of jewelry. And their demand has grown rapidly, by 69% between 2009 and 2010 alone. I can't find too many historical consumption figures for India, but if you look at previous articles on the subject, you will see that phrases like "one year ago" and "20%" are only used to describe India's consumption levels for a few years.
The fact is that India has practically no domestic gold sources. India's handful of gold mines produce about 2.5 tons of metal each year, a fraction of the country's annual consumption of about 800 tons.
Fact. Indian culture places great emphasis on gold as a visible display of wealth. Especially in situations like Indian weddings where the bride brings in gold to show the status and wealth of her family and this is part of the dowry given to the bride. It is believed that a bride wears 24 carat gold at her wedding to bring happiness and happiness throughout the married life.
The fact is, recent trends in outsourcing, Indian citizens working overseas and sending money home, etc. have resulted in an influx of foreign cash into the Indian economy and explosive GDP growth. Take a look at the graph below and compare the current period of 2000 to a graph that shows the price of gold in another answer here. Notice how the curves are largely parallel to each other
Potentially unfounded conclusion from the above numbers. The rapid growth of the Indian economy, coupled with a rich cultural tradition that values gold as a symbol of wealth, as well as a sudden increase in the number of "wealthy" people due to the economy and the influx of foreign cash have resulted in an exploding demand for gold from India , and this high demand for consumption is the most likely explanation for the sudden surge in the price of gold in recent years. Investors then bet on the "rising price," as does anyone who can make a profit selling gold to those who want to get on that train.
As long as India's cultural tradition remains unchanged and its economy remains strong, the resulting increased demand for gold will support current and potentially increased prices. Should Indian GDP suddenly collapse, gold will likely fall in parallel.
Disclaimer: Not an expert, just observations based on the data I've seen. There may be other parts to the “gold demand” picture that I have not considered.
Chuck van der Linden
Chuck van der Linden
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