Will India export gold??
When India is the largest importer of gold, the title seems out of place. But with gold prices are where they are, is there a possibility that we will start thinking of exports?
Lot of analysis has gone into the effect of gold imports on the trade deficit that India has. Looking at that people have suggested that trade deficit is overstated to the extent that gold is not re-exported in the form gems and jewellery. My rough estimate is that the effect maybe roughly 40 bn USD. That is a big chunk of the trade deficit of around 150-160 bn USD.
People have argued that since gold is more an investment than a consumable, markets (particularly currency market) do not seem to be appreciating the value of the gold that Indians hold, which is estimated to be around 18000 tonnes.
Is the market really discounting such a big storage of gold? And if yes, why?
Generally markets are smarter than all of us put together. So, as of now, I will taking the safer option of being on the market's side.
I will try and reason, why the value of the gold in India is not exactly being appreciated and why currency markets are weakening the rupee when we are the biggest holders of gold globally?
First a little bit of history. Have a look at the following chart. This is gold prices in INR terms over the last 38 years.
Source : Bloomberg
Gold started at somewhere around 520 Rs per ounce (please use the relevant conversion numbers for per tola comparison) in 1973 and today quotes around 90000 Rs per ounce. That roughly corresponds to a return of around 14.3% CAGR over a period of 38 years. That is an astounding number!!!
And this happened when through the 1980s and 1990s, gold was in a severe bear market in practically all other major currencies!!
The major reason for this mind-boggling performance in INR terms is that India has been fiscally profligate country all through out.In fact it was only after 1997 that RBI stopped monetising government deficits.Thus all through out this period INR depreciated against all major currencies. Gold has stood out as a fantastic store of value for Indians as 14.3% CAGR will at least compensate for inflation over the time frame if not do slightly better.That being the case, it should not be surprising that Indians have kept buying gold in the face of ever rising prices.They have experienced that it sustains purchasing power over a period of time and use it as shield against the fiscal attacks that government mounts on them every year.
Looking at the present scenario,it is safe to assume fiscal prudence is not on the radar of the government right now.And as long as that continues, a combination of gold prices in USD and USD-INR conversion ratio will probably continue the mind-boggling performance of gold in INR terms.And it is more likely that Indians will keep importing gold, forget exporting it.
And if ever high gold prices were to attract selling by Indians, it should have happened at least to some extent in the last few years or today. But there are no signs of that yet. We are still importing and in large quantities.
Given the likelihood of gold imports continuing, I think markets are correct in discounting the presence of gold in India.
You do not value the home where you stay, since you never intend to sell it!!
When India is the largest importer of gold, the title seems out of place. But with gold prices are where they are, is there a possibility that we will start thinking of exports?
Lot of analysis has gone into the effect of gold imports on the trade deficit that India has. Looking at that people have suggested that trade deficit is overstated to the extent that gold is not re-exported in the form gems and jewellery. My rough estimate is that the effect maybe roughly 40 bn USD. That is a big chunk of the trade deficit of around 150-160 bn USD.
People have argued that since gold is more an investment than a consumable, markets (particularly currency market) do not seem to be appreciating the value of the gold that Indians hold, which is estimated to be around 18000 tonnes.
Is the market really discounting such a big storage of gold? And if yes, why?
Generally markets are smarter than all of us put together. So, as of now, I will taking the safer option of being on the market's side.
I will try and reason, why the value of the gold in India is not exactly being appreciated and why currency markets are weakening the rupee when we are the biggest holders of gold globally?
First a little bit of history. Have a look at the following chart. This is gold prices in INR terms over the last 38 years.
Source : Bloomberg
Gold started at somewhere around 520 Rs per ounce (please use the relevant conversion numbers for per tola comparison) in 1973 and today quotes around 90000 Rs per ounce. That roughly corresponds to a return of around 14.3% CAGR over a period of 38 years. That is an astounding number!!!
And this happened when through the 1980s and 1990s, gold was in a severe bear market in practically all other major currencies!!
The major reason for this mind-boggling performance in INR terms is that India has been fiscally profligate country all through out.In fact it was only after 1997 that RBI stopped monetising government deficits.Thus all through out this period INR depreciated against all major currencies. Gold has stood out as a fantastic store of value for Indians as 14.3% CAGR will at least compensate for inflation over the time frame if not do slightly better.That being the case, it should not be surprising that Indians have kept buying gold in the face of ever rising prices.They have experienced that it sustains purchasing power over a period of time and use it as shield against the fiscal attacks that government mounts on them every year.
Looking at the present scenario,it is safe to assume fiscal prudence is not on the radar of the government right now.And as long as that continues, a combination of gold prices in USD and USD-INR conversion ratio will probably continue the mind-boggling performance of gold in INR terms.And it is more likely that Indians will keep importing gold, forget exporting it.
And if ever high gold prices were to attract selling by Indians, it should have happened at least to some extent in the last few years or today. But there are no signs of that yet. We are still importing and in large quantities.
Given the likelihood of gold imports continuing, I think markets are correct in discounting the presence of gold in India.
You do not value the home where you stay, since you never intend to sell it!!
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