Gold has served as a lifeline for Indians pummeled by the economic storm caused by the government response to the coronavirus pandemic.
The Indian government’s response to the first wave of COVID-19 ravaged the economy. As a result, many banks were reluctant to extend credit due to fear of defaults. In this tight lending environment, many Indians used their stashes of gold to secure loans. As Indians battle the second wave of COVID-19, many Indians have now turned to selling their gold outright in order to make ends meet.
When coronavirus gripped the world, Paul Fernandes initially took out a loan using gold as collateral to pay for his children’s education after he lost his job on a cruise ship. Now he’s turned to selling gold jewelry to meet expenses. He told Bloomberg selling gold keeps him from taking on more debt.
“Selling my jewelry means I am not obligated to pay someone back along with an additional interest on that,” he said.
The second wave of COVID-19 has made a bad situation worse. For many Indians, particularly in rural areas, their investment in gold and gold jewelry is the only thing keeping them afloat.
“You already had a financial problem last year and you got out of that problem through gold loans. Now again, you are having financial problems this year with a potentially third wave on the way, which can again mean lockdowns and job losses,” a consultant at London-based Metals Focus told Bloomberg.
“We can expect distress sales in a big way in August and September when the third wave could actually set in.”
The pandemic (and the government’s response) has pushed millions of Indians into poverty or bankruptcy. Selling gold jewelry is the last resort. As Bloomberg put it, “People in rural areas rely on gold in times of need as it can be easily liquidated.”
In southern India, the country’s biggest per-capita gold consumer, about 25% more of old gold than usual has been sold to jewelers this year, according to Bloomberg.
Gold jewelry in India is different from the US. It’s more than fashion. Indians generally buy 24-karat gold jewelry as opposed to the 14 or 18-karat jewelry found in the US. Indians consider their gold jewelry part of their savings.
And for many Indians, gold is a lifesaver, providing liquidity that they otherwise wouldn’t have.
Indians traditionally buy and hold gold. Collectively, Indian households own an estimated 25,000 tons of gold and that number may be higher given the large black market in the country. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system.
Gold is not just a luxury in India. Even poor people buy gold in the Asian nation. According to an ICE 360 survey in 2018, one in every two households in India purchased gold within the last five years. Overall, 87% of households in the country own some amount of the yellow metal. Even households at the lowest income levels in India own some gold. According to the survey, more than 75% of families in the bottom 10% had managed to buy gold.
Gold was also a major source of liquidity in 2016 when the Indian government launched a demonetization scheme. In November of that year, the Indian government declared that 1,000 and 500 rupee notes would no longer be valid. They gave the public just four hours notice. The 1,000 and 500 rupee notes made up 86 % of the currency in circulation in the country. With a single pronouncement, the Indian government made virtually all of the cash in India valueless. Many Indians have thwarted a government policy to bring the underground economy out of the shadows by converting their “black money” into gold.
Indians understand that gold tends to store value, and that in the end, gold is money. If they have gold, they know they will be able to get the goods and services they need – even in the event of an economic meltdown. And while westerners may not embrace the cultural and religious aspects of the Indian love affair with gold, the economic reasons for their devotion to the yellow metal are every bit as applicable in places like the US.