THE EDUCATOR'S PEN

CBS LINE

Volume 3(12)

Midas Touch or Economic Burden? Unpacking India’s Complex Relationship with Gold

Gold has proven its mettle not only as a precious material but also as a deep-rooted symbol of riches and a necessary component in the cultural and economic construct of India itself. Long considered a rare and beautiful commodity with attributes of being a medium of exchange and a safe investment in times of turbulence and uncertainty, in modern-day markets, it appears in two chief forms: physical gold and paper gold. These two facades represent the actual attributes of gold itself: rarity, divisibility, acceptability around the world and its resistance to any form of corrosion or deterioration. All these qualities come together to make gold a class in itself in the market.

A lot of factors influence the price of gold worldwide. Starting with the supply side, the limitations are real with the current grade of gold reserves having reduced from 2.0 grams per ton of ore in the year 2000 to below 1.0 grams per ton currently, thus increasing the time span between discovery and production to 10-20 years. However, the demand is also increasing with each passing year with major drivers being jewellery, industrial use and investment, majorly in countries with high use of gold such as China and India. Macroeconomic factors are also playing a major role herein. Gold is the traditional inflation hedge, holding its purchasing value during downturns in fiat currency value. Macroeconomic factors such as the decision on whether to cut the interest rate on major central banks, such as the Fed on USD, greatly affects its demand, as low rates make the return on gold, with zero yield, very attractive. A decrease in the value of the dollar increases the demand for gold and with the rupee falling, its price increases since it has to be imported.

Instability in geopolitics and institutional demand are additional factors that influence markets for gold. Instability in countries through conflict, trade wars and political instability causes market participants to turn to gold as an asset for safe haven. On the other hand, central banks across the world are actively buying gold to diversify their respective foreign exchange reserves with a view to improving their balance sheets. For instance, the Reserve Bank of India added an additional 102 tons of gold to their domestic reserves for the period of March to September of 2024, increasing their total to 510 tons.

The gold markets have well-organized international and domestic channels. International gold market hubs include London, New York and Zurich, although the domestic market in India is organized via the Multi Commodity Exchange (MCX) to a large extent. Gold trade takes place in spot markets, where gold is delivered simultaneously; futures markets, where gold is delivered at a particular date in the future; and gold ETFs, where gold is represented in the form of stocks, so people can hold gold stocks instead of actual gold. The Indian Gold ETFs, for example, recorded significant total inflows of around ₹93 billion in the first ten months of 2024. The final gold price is ultimately regulated by the forces of demand and supply, with significant macroeconomic factors in between.

In the Indian setting, gold has an unparalleled social and economic importance. It ranks among the top gold-buying nations, with an average yearly requirement of 700-800 tonnes. It must be noted that 50% of the total requirement in the Indian market comes from gold used during celebrations and functions. However, the country imports 70-80% of gold to cater to the average yearly requirement. There has been a massive 27.27% increase in gold imports to the value of $58 billion during the fiscal year 2024-25. The average gold inventory in Indian households has been estimated at a mind-boggling level of $3.8 trillion, which constitutes 88.8% of the GDP of the Indian economy. This provides tremendous intensity to the credit market in the Indian economy and the gold loan market has been valued at around 7.1 lakh crores in 2024, which will grow to 14.19 lakh crores in 2028. In order to control the massive gold requirement and curb illicit business in gold, the Indian government has reduced the gold import duty from 15% to 6% in the 2024 Union Budget.

The history of gold prices indicates a fluctuating but upward movement. The early 2000s saw the start of an uninterrupted bull phase with an impressive 819.2% rise in gold prices from 2000 to September 2024, contributed by the growth of the Chinese economy and the global financial crisis of 2008. In India, the global financial crisis of 2008-09 saw a rise in gold prices from ₹12,500 to ₹14,500 per 10 grams. The period of 2010-11 saw a record annual hike in gold prices with an increase from ₹18,500 to ₹26,400 per 10 grams. Also, recently, with the COVID-19 pandemic, the Russia-Ukraine conflict, as well as the overall impact of inflation, the gold prices saw a dramatic rise in the period 2020-24, pushing gold prices to cross ₹98,000 in April 2025 and touch ₹1,10,000 later in the year. Rising gold prices affect the middle ground for all interested parties. For the investor, the rising prices excite potential higher profits but also pose a higher potential risk of increased volatility. For the consumer—particularly the Indian—the higher prices reflect a direct margin effect on the rising prices of gold jewellery and other gold products. For the Indian economy at large, the implications are more complex. A higher import bill because of increased gold imports will contribute further to the Current Account Deficit. This situation will further contribute to a devalued Indian Rupee. Higher profits from gold returns could draw Indian household savings away from the financial markets—namely the stock and property markets.

There are a few challenges, which remain in making sure that gold is a stable commodity in terms of pricing. Fluctuations in exchange rates of INR-USD, import duties and taxes and then obviously smuggling activities remain a concern; although, recent changes in import duties can help counter this problem. Then, obviously, policies and unforeseen incidents in the global economy. Looking ahead and looking closer to home, a clear strategy is necessary. Gold still has a crucial role to play in a diversified investment portfolio and should continue to be recognized and revered for that purpose and for purposes of hedge protection. Creating a sustainable gold ecosystem in India is necessary; this would include encouraging a formal gold recycling system and strong processing industries. All of this will simultaneously complement advancements in mining and new financial instruments that will influence gold’s future patterns of supply and trade.

        Gold as the incomparable commodity has its worth in the global economic system intricately interwoven with the global environment. For India, gold is a complex symbol that is both cherished as a part of its culture as well as posing as a challenge for the Indian economy. It is important that the Indian government implements its policies in the right manner. It is going to be important to address the rising trends of gold in the years to come.Several challenges persist in ensuring gold price stability. These include fluctuations in the INR-USD exchange rate, the impact of import duties and taxes and the lingering issue of smuggling and informal trade—though recent duty cuts aim to mitigate this. Additionally, global economic policies and unpredictable geopolitical events continue to inject volatility into the market. Looking ahead, a strategic approach is essential. Gold should continue to be viewed as a long-term component of a diversified investment portfolio, valued for its hedging capabilities. Building a sustainable gold ecosystem within India is crucial; this involves promoting the formal recycling of domestic gold and developing robust processing industries for exchanging old gold. Such measures can reduce import dependency. Concurrently, technological advancements in mining and the development of innovative financial products will shape the future of gold supply and trading.

In conclusion, gold’s enduring value remains inextricably linked to the global economic and geopolitical landscape. For India, it represents a complex duality: a cherished cultural asset and a macroeconomic challenge. Navigating this duality requires a balanced policy framework that fosters responsible consumption, strengthens the domestic gold ecosystem and leverages gold’s financial utility without compromising broader economic stability. As prices continue to evolve, informed policy-making and strategic market engagement will be key to harnessing gold’s benefits while mitigating its associated risks.

 

Amal Philip

Assistant Professor

Department of Economics

St Joseph’s College Moolamattom Autonomous

Idukki 

 Kerala