first majestic silver

India's Love of Gold - 3

The Micro View of Gold in the Indian Society

May 30, 2002

India has the highest demand for gold in the world and more than 90% of this gold is acquired in the form of jewellery. The bulk of the Indian jewellery buying is still rooted in tradition and jewellery is sold in traditional designs.

Jewellery designs vary in different regions of India, making the style unique to each region. In south India the designs are inspired by nature - paisley motif of the mango, rice grains, melon and cucumber seeds, etc. In western and northern India the Mughals influenced the meenakari (enamelling) and kundan (setting of precious and semi-precious stones in gold) styles to give just give a few examples. Jewellery is crafted not just for humans but also for the deities, ceremonial elephants, and horses. Hence the varieties of gold jewellery in India are truly mind-boggling and bears testimony to the excellent skills of Indian jewellers even today (1).

Ornaments are made practically for every part of the body, called 'solah shringar' (16 types of body adornment) - nose rings, bangles, necklaces and special jewellery for the head, ankles, waistbands, and so on (2). Hindu women wear the 'mangalsutra' or 'thali' to signify their marital status, which consists of gold pendants strung in a certain combination with other beads (1). However, all over India, the toe rings adorning the feet are made only in silver and never in gold. Gold is Goddess Laxmi incarnate (goddess of wealth) and She cannot be soiled by touching a human's feet.

Jewellery is fabricated mainly in 22 and 24-karat gold and even 18-karat is not favoured as the mindset will not accept low purity gold jewellery. The logic is that the jewellery is primarily bought as an investment in gold as a store of value, and investing in a low purity product does not make sense. Designer jewellery is generally not very popular and may not pick up in a big way. The reason is that the investment is made for the gold content in the jewellery and not for some fancy designer's name.

Confidence has been the anchor of the gold jewellery trade in India. A jeweller or goldsmith of reasonable standing in a local area has a fixed and loyal clientele. He is the family jeweller (like a family doctor) and his services are requisitioned whenever any jewellery is to be purchased or fabricated. The buyer has implicit faith in his jeweller. Additionally, the local jeweller caters to the local taste for traditional jewellery. This has led to a very fragmented and unorganized market - a Rs 300 billions market is in the unorganized sector!

However, standardization of jewellery designs across the country is not feasible due to the pre-dominance of local tastes. Some chains and large jewellers have now started thinking on the lines of expanding their network and marketing nationally, but this is an uphill task as this is a very person-oriented business. The chains would have to cater to local tastes by giving the designs that customers want, and win the trust and confidence by hallmarking and proving the purity of the gold as they have to compete with the local jeweller (3). After the liberalization of the markets a lot of jewelers sprung up, and due to the competition a lot of the jewellery was being marketed which did not have the stated purity. The system with standard jewelers is that they mark their jewellery and if you resell it to them they will buy it back at the stated purity. However if this jewellery is sold in the open market the purity may or may not be as marked and the investor will lose money.

In a sense I would consider investment in gold jewellery to be very inefficient as the cost of labour or making charges is between 10%(wholesale) and 15%(retail) of the gold cost! This labour component is a loss when gold is sold in the market. Often the purity is never exactly as stated and even a small loss counts. Hence the move towards hallmarking will slowly but surely pick up.

This was part of the reason for the failure of the government gold bond schemes. If an investor were to surrender his jewellery which was tested and found to be of a lower quality, he became skeptical of the testing process. He would lose a lot of money due to lower gold purity as well as making charges. Also, the sentiments associated with gold jewellery were deterring the gold owners from participating in the gold deposit scheme. The gold would be returned in the form of bars and hence the identity of the jewellery would be lost.

Indian men down the ages have also used gold for adornments. The most striking and enduring images of a powerful, rich Indian past in painting, literature, and photographs show our maharajahs and noblemen decked out in stones and ropes of gold and pearls. It is a chronicle of the magnificence of Indian men and a confident culture, and definitely not garish. The Britishers succeeded in imposing their code of dressing that they considered to be in good taste and ornate jewellery was definitely out. So now the Indian male dresses in gold and diamond "kurta" buttons and maybe a necklace and a bracelet on festive occasions (4).

Exposure to western influences and the media has spawned a consumerist culture. The proliferation of modern gadgetry like laptops, cellphones and white goods like washing machines have grabbed away a part of the urban Indian's disposable income. The lure of spending on these modern gadgets has taken precedence over the older virtue of saving. Also, the urban Indian has been exposed to alternate forms of savings like equities and bonds via mutual funds which have diminished their desire for gold. In effect, dampening the urban demand for gold. The passion for gold between the urban and the rural Indian will widen.

Indian rulers of the past have issued gold coins and these are hoarded for their investment value. Hoarding jewellery for its gold content is very inefficient as it leads to a lot of wastage to recover the gold content, hence the popularity of gold coins and bars. A local bullion dealer will issue and sell coins and bars bearing his own stamp to his clientele who have confidence in the purity, having dealt with the dealer over a long period of time. The standardised British guinea, a 22-karat, 8-gram coin, is a popular investment vehicle carrying an antique value. It was introduced into India in the 19th century, and later the British set up a mint in Bombay where the guineas were minted for Indians. The guinea became established as a standard gold weight in India (5).

The local price of gold has been hitting new highs in the recent past - Rs 5300 per 10 grams, which the average Indian investor thinks is very good. The Rupee being a soft currency, the effect of the US$ - Indian Rupee exchange rate is indicative of the inflation rate, which is not being considered by this investor. In 1980 when the gold price was US$ 614.50 per oz the gold price in India was about Rs 1452 per 10 grams according to GFMS (average prices). Today when the price of gold is US$ 315 per oz, the Indian price is about Rs 5300 per 10 grams - the pernicious effect of the currency devaluation and inflation is completely camouflaged by the high nominal rupee price.

Vijay Sarda observed that if the gold prices remain high, retail selling (dishoarding) will overwhelm the markets and imports may drop. The festival buying season will be over in May / early June. I would say this is typical investor behaviour conditioned by a prolonged bear market - selling on a slight uptick fearing further falls later. Consider the following table of nominal prices since 1970:

Price in Rupees per 10 grams

Data from Gold Survey 2001

Studying the nominal rupee prices we observe that an investor would have been receiving lower appreciation for every subsequent five-year period since 1970. After liberalization of the gold trade in 1992, the prices have been static and the five-year returns are abysmal, similar to the international trends. In 1996, the price touched Rs 5900 but there was no dishoarding. The subsequent fall and stagnation in prices at the lower level has lead to capitulation by the investor - for every rise in prices, investors rush to sell - classic bear market bottom behaviour. I would also like to point out that with the sustained bear market, most investors, except the die-hard gold bugs, have thrown in the towel! Talking to local brokers, investors and dealers about gold investment, the typical myopic advice is to buy in say July-August and sell in November and other similar short-term trades - typical bear market conditioning!

The five-year returns in real price terms (inflation-adjusted in constant 2000 rupees) are even worse for the last 20 years! A devastating bear market for gold and definitely not for the faint-hearted! This is what a bear market bottom looks like, and this may be the best investment opportunity in gold for a long time to come!

Part 1      Part 2


Pinank Mehta

May 30, 2002



  1. Bombay Times - October 26, 2001
  2. Bombay Times - November 11, 2001
  3. The Midas Touch, Business Standard, June 19, 2001
  4. Trends Trek, Shalini Sharma, Indian Express, November 11, 2001
  5. Bombay Times - October 18, 2001


Pinank Mehta is a director with Métier Capital Management Pvt. Ltd. advising on wealth management. He can be contacted at [email protected]

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