Gold Jewellery Investing: How Indians Successfully Defended Their Centuries-old-Practice

How Indians Defended the Practice of Gold Investments: A Brief History

When it comes to gold, India holds a place of pride. Among the top 10 countries with the largest gold reserves, India has always had a cultural and emotional relevance when it comes to yellow metal. Since time immemorial, the precious metal has been considered not just a symbol of prosperity, but also a token of goodwill. 

With gold rate appreciating over the years, the yellow metal has been the preferred investment mode for traditional, risk-averse investors. Moreover, investing in this asset is believed to provide hedge against inflation. It certainly is relied on in times of turmoil. 

That’s why investing in gold is considered a smart option by conservative and modern investors. Over the past decade, the yellow metal has appreciated by a whopping 160%. While the 10-gram gold rate was ₹18,500 in 2010, it increased to around ₹48,651 in 2020. 

This drastic increase in gold rates can be attributed to its popularity and stability. Even our nation’s history attests to this fact. To understand how gold as a commodity and an investment continued strong despite stringent regulations in the past, read on. 

Gold in India, Over the Years

India’s strong connection with gold is one of the prime reasons its citizenry believes in buying gold jewellery, coins and bars. From being used as a religious offering to being gifted during weddings and festivals, gold has always found its way to Indian households.

Fluctuations in gold rates also showcase the economic plight of the Indian market. Like all assets, its price varies based on demand and supply, and in the 1960s, India’s obsession with gold increased demand by leaps and bounds.

When domestic production did not suffice, gold had to be imported from other countries. Subsequently, the value of the Indian rupee began to depreciate, leading to the depletion of foreign exchange reserves.

This alarming situation forced then Finance Minister Morarji Desai to introduce the Gold Control Act in 1962. As per regulations, banks were not allowed to give out gold loans, and a complete ban on gold trading was initiated. In 1963, the Act prohibited gold jewellery production above the 14-carat mark. A gold bond scheme with tax implications was also launched to decrease unaccounted wealth among Indians.

When such reforms failed to deliver results, in 1968, the Act was revised and the Gold Control Act 1968 was brought in. As per the revised Act, owning gold in coins or bars was not permitted. 

There were umpteen restrictions imposed on goldsmiths and licensed dealers too. While the former were allowed to own up to 100 grams of gold to make jewellery, the latter were permitted to have only up to 2 kilograms of gold in possession. Trading too was strictly banned. 

While this move by the government was primarily to increase the value of the rupee and hence boost India’s economic health, Indians could not digest these regulations. As a result, there was increased activity in the hawala market. The smuggling of gold became more common as the demand for gold in the Indian market remained firm.

With the black economy mushrooming, rampant tax evasion paved the way for corruption, which ultimately decreased the shine of the Indian market. Hoping that Indians would respond positively to the Gold Control Act and recycle existing gold to make new jewellery, Morarji Desai aimed to reduce the import of gold.

However, Indians could not let go of their hopes tied to this yellow metal. Experts believe that the main reason for the Act’s failure could be a lack of financial education. Whatever the cause, the population spoke, and Indians defended their right to continue buying and investing in gold. While the economy during that time became worse off, to date, gold enjoys fiduciary value and continues to remain the most preferred metal among Indians.

Gold On the Other Side of the Ocean 

While the Gold Control Act did not sit well in the country, a similar initiative was launched by the then US President, Theodore Roosevelt. This is one of the reasons that experts believe the US has dominated the world economy to date.

When the US was required to reflate their economy and print more dollars during the Great Depression, the President issued order 6102. Accordingly, there was a complete prohibition on holding gold privately.

Americans were willing to give their private holding to the US Government at low gold rates. This is one of the reasons why the US became the largest country to own gold reserves globally. 

So, while gold is often talked about as the safest alternative to combat rising inflation, remember that gold purchase does not contribute significantly to the economy. After all, the gold you invest in is kept idle for the longest period and used only during financial emergencies.

Gold Investment and Gold Loans 

One of the most important advantages of gold is that it has zero correlation to other asset classes. So, gold investments act as a buffer in your financial portfolio. That said, always remember that gold’s value is inversely proportional to other traditional investment options such as stocks and mutual funds.

As mentioned, an increase or decrease in gold rates is subject to demand and supply factors. Being a natural resource, the supply of this precious metal is always limited. So, there is an ever-increasing demand for gold, considering its cultural and historical relevance in India.

Investing in gold can thus fetch excellent returns over the years. That said, there are always other vehicles for gold investments, such as Sovereign Gold Bonds, Gold Exchange Traded Funds and digital gold. In fact, a 2022 survey called ‘India Investment Behaviour’ revealed that more than 50% of participants choose gold as a preferred investment, surpassing even mutual funds. What’s more, youth between 18 and 24 years of age prioritised digital gold above all else.

Plus, availing a gold loan can help you manage financial emergencies quickly. When you have a need for funds, you can easily pledge your gold jewellery without much documentation or even a high credit score. Reputed, legitimate lenders are the way to go here to ensure safety and competitive terms. With a gold loan interest rate calculator available online, planning monthly finances for repayment has also become more comfortable. 

With the continued reliance on gold in India, the yellow metal is certainly here to stay!