India's Economy Faces Massive Private Gold Possession Dilemma

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The prediction that gold purchases by India will grow for the first time since 2010 is not seen as altogether good news for the country's economic balance.

Earlier this year, the Reserve Bank of India (RBI) worried that the gold bullion as a safe haven investment was turning into an asset bubble and that if it burst, it would damage the country's financial system. The RBI said at that time that the unabated rise in the international gold prices since 2003, which have further gained pace, was a result of panic buying.

This was set against research by Macquarie Bank that Indian households were hoarding 18,000 tons of gold worth (at that time) $950 billion, which was equal to 50% of India's gross domestic product. It is estimated that 3,800 to 6,000 tons of "non-ornamented" gold are held in India.

At that time, the Financial Times said that "the vast amounts of gold widens the country's current account deficit, weakens the rupee and generally keeps money that could flow into the economy locked up in cupboards and jewelry boxes."

The oncoming Diwali festival will see a peak in gold buying. Bloomberg quotes Bachhraj Barnalwa, chairman of the All India Gems & Jewelry Trade Federation, saying that due to pent up demand, imports may jump to 200 tons in the coming quarter from 170 tons in the current quarter.

All this means is that the ancient Indian proclivity for possessing gold is diverting solid capital from driving economic development. And if gold hits a bubble and the price plummets, no matter what, gold is in the family for many generations.

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