Investors are moving away from gold to control inflation

Gold demand is expected to rise in the near term due to rising inflation. But consumer demand grew only 12% from Q2 to Q3, while inflation stood at over 7% over the past two months. Why didn’t high inflation increase 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 this persists, gold’s reaction may be different. Also, at present, the impact of inflation is probably not yet fully felt as the impact of the covid pandemic is still not over, the middle class still has the spending power and the free food schemes are probably the top of the pyramid. Keeping the lower end soft. Second, the role of reform in financial inclusion has been underestimated. Compared to 2011, 2012 and 2013, when inflation was high and people actually went for gold, financial inclusion has increased significantly, if you look at the number of bank accounts and demat accounts opened since then. Therefore, people are able to manage inflation and investment in a far more different way than before. Now, investment in the stock market has increased and access to foreign equities has become easier. I don’t have the data to say how much this has taken people out, but what I am trying to say is that it is not exactly the same as it was in the past where gold mainly played a big role in inflation. in management, especially in rural markets and with those who were accustomed to transacting in cash. Gold is playing its part, but obviously at the macroeconomic level, the structurally over-reliance on gold, especially for weaker sections, is removed.

Investing in gold this year has been largely muted. Why do you think this is happening?

People generally buy jewelery and there must be a strong reason for them to flock to bars and coins – either a significant price drop, as happened in 2013 or the wider impact of inflation, which, as I said, is still there. The beginning of the trend and we haven’t really encountered it. Therefore, there is no significant reason to increase demand for bars and coins this year. I would like to add that this is an unbranded product in India unlike other countries which have nationally branded coins and have reported exceptional sales. Hence, sales efforts in India are high. Second, right now people’s appetite for jewelry is high. Prices have softened in the near future, but prices have increased by about 50% compared to two years ago, so there is no attraction for bars and coins and people are buying jewelery for weddings and festivals.