World Gold Council estimates that India owns almost twenty-five thousand tonnes of Gold. This perhaps represents the largest stock of gold on earth and translates to thirteen percent of the total gold mined since the beginning of civilisation (Read more about the same here). In “fiat currency” terms the value of this gold stock equals USD 1.55 trillion i.e. more than 50% of India’s GDP. This equates to eighty percent of the total market capitalisation of all listed entities on Bombay Stock Exchange and more than three fourths of total deposits placed with banks.
Gold price over the past twenty-four months has increased by more than sixty percent. Only twice over the past four decades has the trailing twelve-month percentage increase in gold price been more than the current rally. This has resulted in massive wealth creation at a consolidated level which can act as cushion for some of the negative impact of the current economic crisis. This is all the more significant since unlike other financials assets like stocks, the ownership of gold is much more inclusive. As can be seen in below graph, ownership of gold is substantial even amongst people having annual incomes less than one lakh. Further rural India, where mainstream financial products have been inaccessible, has much higher proportion of people owning gold compared to urban India.
The benefits that can come from the present rally in Gold price should not be underestimated. Last, when Gold witnessed a rally of more than fifty percent was in 2010-2012. That period was also marked by persistent high inflation despite significant monetary tightening (RBI increased the repo rates to as high as 8%). During that period, Urjit Patel in an article (can be read here) offered an interesting explanation for high inflation. He explained how “wealth effect” caused due to rally in gold prices may be propping up household consumption which may be partially offsetting the effects of monetary tightening thus leading to higher inflation. The “wealth effect” theory even started making rounds during the corporate earnings presentations. Uday Kotak in a 2013 earnings conference call highlighted how “wealth effect” of gold along with real estate may be contributing to the booming consumer portfolio of Kotak Bank.
If the gold prices increase further or stay at these levels for another quarter or two, the wealth effect may start getting internalised by households and may start becoming visible. This along with good expected monsoons may result in good rural growth. SMEs which have been hit by pandemic may also avail gold loans to smoothen their cashflows and get their businesses back on track. CRISIL in a recent report has also projected that even though NBFC AUM is expected to degrow for the first time in twenty years, gold financing sector will continue to see robust growth and will grow by mid-teens in this fiscal.