Why do Indians buy so much Gold? How does buying gold affect the economy?

As Indians, we have a significant relationship with gold.

Like most Indian families bought gold every time we had a little bit of extra money. While growing up, I would often ask all Indian families, “why are we buying so much of gold?” The standard reply was, “gold is not a purchase it is an investment.”

Have you ever noticed that gold is the only investment that you can wear around your neck? Like, try going to a wedding wearing all your mutual fund documents around your neck. You will get kicked out of that wedding. I think it’s safe to say that we have a somewhat emotional relationship with gold and for a good reason, too, right?

Because if you look at the last ten years, gold rates have only been on the increase. So it makes every sense to buy gold because we get a higher return when we have to sell it if we need that money.

However, this has dramatically affected the Indian economy because India does not have that many mines and reserves to take care of our demand for gold, so what we end up doing is we end up importing this gold from other countries. Now here’s what happens when we import gold – we don’t use the Indian rupee; instead, we use dollars so that we have to convert more and more rupees into dollars every time we import gold.

Because of that, the demand for the dollar increases, so does its value, and because of this, the price of the dollar has been increasing, and the cost of the rupee has been reducing. When the rupee’s value reduces, this significantly affects our economy because all our imports become that much more costly.

Take, for instance, our import of oil. Unlike gold, oil is essential, so since oil is becoming more expensive, it poses a problem for Indians.

How do we solve this problem?

To solve this problem, India’s government announced a well-meaning scheme known as the gold monetization scheme set up in 2015.

To reduce the amount of gold that we import does the best way is to source the gold from our country. Still, it’s not that simple because gold mines and reserves are not enough to take care of our gold demand. Where do we go for this extra gold? what if we make use of all the gold simply sitting in various lockers across the country and find a way to mobilize and monetize this gold instead of it just being idle?

This scheme intended to do so by this scheme what you could do is deposit gold in a bank, and every year you would be paid an interest of 2.5%. It is kind of like a fixed deposit scheme except that you deposit gold and get your returns in gold.

Now how does this scheme work behind the scenes? As soon as your bank gets a hold of your gold, they send it to a collection and purity testing center where its value is determined. Once its value is determined, it is sent to a refinery where your gold is melted and converted into gold coins. These gold coins are then sent to the bank. Now jewelers come to the bank to get these gold coins instead of importing them from other countries to reduce imported gold.

Now, this is a remarkable initiative, but there are a few challenges.

First and foremost, not every Indian would be terrific because their jewelry melted and converted into gold coins as we have an emotional relationship with gold. Banks face the second challenge.

Banks implementing the scheme have to undergo the headache of transporting this gold to a collection and purity testing center and then to a refinery and then back to a bank. They would have to bear costs such as insurance costs, transportation costs, processing fees, and other charges.

So they would have no incentive to implement the scheme because there are other easier-to-implement strategies that they can work on, which will give them better margins. Because of all these challenges through the government implemented this scheme, we have only monetized about 20 tons of gold, which is about three percent of our annual demand for gold.

Maybe instead of telling Indians not to have such an emotional dependence on gold. What if there were other schemes that we could rely on to protect our downside, just like how we buy gold intending to sell it when we need that money because it’s going to give us higher returns given the fact that gold rates have always been on the increase.

What if we had other schemes like perhaps if we had other avenues to protect our downside, including insurance policies, fixed deposits, or even a savings account?

Maybe we won’t have to rely on gold that much, and because of which our import of gold would reduce, and the value of the rupee would increase.

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