Equinomics Research & Advisory..!
Indian households are estimated to have nearly 30,000 tonne of gold, which is worth nearly Rs. 78 lakh crore - this is equivalent to nearly 70% of India's GDP!
India has imported about $ 18,000 Crore worth of gold since FY2010. The net import of gold could be about $ 10,000 crore after netting out the gold used for re-exports in these 5 years.
This means India has exported over Rs. 5 lakh crore worth of domestic capital in the form of gold imports during this period.
The value of gold held by the Indian households at nearly Rs. 78 lakh crore compares closely with the size of bank deposits (Nearly Rs. 83 lakh crore) and the market-cap of domestic equities (about Rs. 100 lakh crore).
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| G.Chokkalingam |
The other major competing asset is real estate, whose market-cap must be multiple of these two asset classes.
The equity asset class is perceived to be more risky than the gold in India.
However, gold is also known for a huge volatility. It fell nearly 28% in the year 2013 which was the worst in the last 30 years.
In early 1980s, it fell from $ 700 per ounce to $ 300 and remained in the range of $ 300 to $ 500 per ounce most part of 1980s. Just imagine what could be the situation of Indian households, if any political force on the earth or powerful hedge funds were to trigger a major fall in gold prices like what we saw recently in crude oil prices!
Today, the base of gold held by the households is so huge that even 20 % fall from the current level in its price can have structurally adverse impact on the individual investors as it can wipe out over Rs. 15 lakh crore of their wealth!
At global level only 2 % of gold is mined every year, the rest 98 % is recycled. In India, more than 90 % of our demand is met by imports.
Nearly 70 % of overall equity assets and more than 90 % of real estate are held by the Indians.
So, in the case of these 2 assets, it is near "a zero-sum game" – loss for some investors (buyers) is gain for the fellow Indian investors (sellers) in the event of price crash.
Of course, the share of FIIs in the domestic "floating" equity is quite high. But the year FY2009 has proven that it is actually "one-way traffic" – more the FIIs try to take out from the equity markets, less they would reap back as the domestic equity market doesn't have the required appetite to absorb their selling.
However, the Indian investors have to lose only, if gold prices were to fall as sellers of gold to them are located outside the country. Of course, out-right banning import of gold would impact the jewellery industry, which has grown in size and offers huge employment.
In the collective interests of jewelers, economy and investing public, promoting recycling of domestic gold available within the country for the domestic investment would be the best option. It becomes a "zero-sum game" – fellow Indian who sold gold at higher prices would come back to the markets to provide support by buying back the same at cheaper prices.
India, a capital-starved nation would also avert export of precious capital (dollar). The jewellery industry would also benefit – as not every domestic gold investor is a loser in this "protected" market.
About the author
Mr. G.Chokkalingam is Founder & Managing Director
at Equinomics Research & Advisory Pvt Ltd, Mumbai
Equinomics Research & Advisory Pvt Ltd
18- 3/A, Ekta CHS, Shiv Dham Complex
(Opp to Oberoi Mall)
Filmcity Road, Malad (East)
Mumbai - 400 097
E- mail: chokka.g@equinomics.in
Web Site http://equinomics.in
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