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Gold Investment and its Impact on Indian Economy

April 21, 2023

Table of Contents

    Table of Contents

      Learn how gold can impact the economy and your purchasing power. Invest in gold and contribute to improve India’s financial strength.

      For thousands of years, gold has been considered as the most valued metal in humankind. Impact of Gold on Indian Economy has been significant. Jobs, businesses, skill sets, etc. have blossomed around it.

      Even wars have been fought over this shiny yellow metal. Gold is one of the most sought after metals in the jewellery industry. It is the symbol of wealth, prosperity, and good fortune.

      Men and women have adorned gold for thousands of years. However, its usage has been limited to jewellery making until now, be it as a crown during the rules of kings and queens or today as an ornament for beautification. 

      What makes gold stand out among other metals is its positioning as a symbol of status and an investment material owing to its high value, which is why gold ornaments are passed on from generation to generation.

      Over the years, purchasing gold as an investment has become a norm, believing that it can be sold at a high price during any adverse time.

      But, here's a thing. It's not true. Today, physical gold is no longer a good investment material. Why? Because when we sell a gold ornament, we lose a significant chunk of money. Let us give you an example.

      Suppose you have purchased a beautiful, intricately-made gold necklace for ₹5,00,000. The price of gold ornaments includes a making charge. Gold that is used for making jewellery includes some impurities that make the metal stronger.

      The lower the gold carat, the higher the impurity. Also, tax is levied upon the sale of gold. All these factors diminish the value of gold ornaments when you try to sell them.

      So, when you try to sell that gold necklace worth ₹5,00,000 unless the gold rate has increased drastically, you may not get your desired price.

      So, what's the solution?

      Introducing Digital Gold

      Over the past decade, digital gold has emerged as a popular investment choice. It is majorly because of its less volatile nature than stocks and provides decent passive income.

      Not just a long-term investment, many investors are now parking their hard-earned money in various forms of digital gold for a short time as well. 

      Here's how you can invest in stocks:

      Sovereign Gold Bond (SGB):

      The Reserve Bank of India (RBI) issues SGBs. Therefore, it is considered one of the safest forms of digital gold. It yields 2.5% interest, which is paid half-yearly.

      Each bond qualifies for 1 gram 24 carat gold, which is the purest form of gold, and hence costs the most. It matures in eight years. 

      SGBs reduce the risk of misplacing and getting stolen as they are dispatched in your Demat account, unlike physical gold.

      Therefore, it's liquid and can be traded on the stock market.

      Gold ETF

      Gold Exchange Traded Funds (ETFs) are nothing but mutual funds that trade in gold. It's perfect for investors who prefer to invest small amounts in Demant format.

      You can even take a loan against these Gold ETFs during any emergency. It's a good option for the first time or novice investors.

      Digital Wallet

      Recently, many digital wallet providers like Jar have introduced gold wallets. What makes these wallets an immensely popular medium of investment for gold is their low investment rate. 

      You can invest as low as ₹1 in a gold wallet through your mobile app and get 99.5% pure gold of equal value.

      So, every time you purchase something online, you can automatically invest the change amount to digital gold. It's a great way to build a habit of investing. 

      How Does Gold Influence Various Aspects of Economy

      In the old days, the strength of a king was valued based on his gold reserve. It is applicable even today. Shocking, right?

      Today, the gold prices can affect the strength of a country's currency. Not only that, it can immensely impact inflation and deflation as well. Here's how:

      Effect on Rupee

      One of the major parts of the income of a country comes from trading its homegrown goods. The country that exports the most naturally has more revenue than the country that depends on imported goods. 

      This applies to gold import-export as well. So, the export of gold from a country is higher, and the value of that country's currency is also higher. But the sad reality is that India is one of the biggest importers of gold.

      Therefore, every time the Indian gold rate increases in the international market, the value of the Indian Rupee reduces.

      Impact on Inflation

      The gold price fluctuates due to many reasons. One of them is the import and export of the metal. Rise in gold import can directly cause inflation in a country. Here's how.

      For instance, due to high demand in the country, India has to import gold from abroad. To pay for the gold, RBI has to produce an additional Indian currency (paper currency), also known as FIAT currency. However, this surplus supply of FIAT currency then causes the country's inflation. 

      How? It's basic economics. When an increased amount of money is used for the same amount of goods, the value of that money drops. That means the purchasing power drops. So, then the value of rupees drops, and inflation happens. 

      Hedging Inflation

      Just as importing gold can cause inflation in a country, increased investment in gold can balance the dropping value of the currency. Here's how. 

      Investors prefer to purchase gold during inflation as the demand then is higher than the supply. The more investors trade gold in the stock market; its price continues to increase. As a direct impact, currency value also rises.

      Thus, gold investments can hedge against inflation in the country. It also helps to strengthen a country's FIAT currency in the world market. 

      Final Thoughts

      We Indians love gold in any form, jewellery being our favourite. It's a popular form of investment, a metaphor for religious events and social standards during weddings. However, this shiny yellow metal is much more. 

      Gold has the strength to break or make a country's economy. Furthermore, the advent of digital gold has also slowly begun to show its impact on it. It is yet to see how increased investment in digital gold will impact the US Dollar and, in turn, Indian Rupee.