Investors are moving away from gold to manage inflation

Rising inflation is expected to drive demand for gold in the short term. But consumer demand from Q2 to Q3 rose by just 12%, while inflation was high at over 7% in the last two months. Why didn’t high inflation push demand significantly?

 We are not seeing the kind of runaway inflation that we saw in 2011-12. We are probably at the beginning of this inflation curve and if it persists, the reaction to gold may be different. Also, currently,  the impact of inflation is perhaps not felt fully yet as the covid pandemic effect is yet to wear out, middle class still has spending power and the free grains schemes are probably keeping the lower end of the pyramid softened. Second, the role that improving financial inclusion has played is underestimated. Compared to 2011, 2012 and 2013, when inflation was high and people really went for gold, financial inclusion has increased significantly, if you look at the number of bank accounts and demat accounts opened since then. So, people are able to manage inflation and investments much more differently than in the past. Now, stock market investments have increased and access to foreign equities has eased. I don’t have the figures to say how much this has caused people to move out, but I’m trying to say that it is not exactly the same locked-up situation as it was in the past where gold played a predominantly large role in managing inflation, particularly in the rural markets and with people who were used to dealing in cash. Gold is playing its role, but clearly at the macroeconomic level, structurally over-dependence on gold is removed, particularly for the vulnerable sections. 

Gold investments have largely remained muted this year. Why do you think that’s happening?

People generally buy jewellery and for them to flock to bars and coins, there has to be a strong reason–either a significant price drop, like it happened in 2013 or a massive impact of inflation, which, as I said, is still at the beginning of the trend and we haven’t really faced it. So, this year for bars and coins there is no significant reason to drive demand. I want to add that it is an unbranded product in India, unlike other countries which have national branded coins and they have reported extraordinary sales. So, the sales efforts are higher in India.  Second, people’s appetite for jewellery is higher right now. The prices have softened in the near term, but compared to two years back, prices are up by almost 50% so there’s no attraction to bars and coins and people are rather buying jewellery for weddings and festivals.