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Expert urges Indians to buy financial gold, not jewellery, as high premiums make jewellery a poor investment and may widen India’s CAD.
Gold jewellery investment isn’t make much sense, says Kotak Note
Buying gold jewellery for an investment product isn’t make much sense as gold prices would need to rise 25-30% for households to break even on their purchases, according to Sanjeev Prasad, MD & Co-Head, Kotak Institutional Equities.
The note came following Indian households have seen a sharp increase in the value of their gold stock, the bulk of which is in the form of jewelry, in recent times. The major cause of the surge of interest is rising gold prices at a record level amid Central banks buying spree and macroeconomic instability.
Prasad said in the note that the ‘wealth effect’ may be much lower for purchasing gold jewellery, given the premiums households pay in the form of (1) making charges and (2) precious stones, which have seen steady price corrections that would have offset part of the gains from the sharp rise in gold prices.
“We estimate 10.3% IRR for household gold jewelry purchases over FY2011-1HFY26 versus the 12.5% CAGR in gold prices (fiscal average) on INR basis over this period,” he added in the note.
According to the note, Indian households’ gold holdings are (1) owned largely by low-income households, (2) held as insurance against exigencies and (3) used for specific big-ticket spending (such as education and wedding).
“That the FOMO from the sharp increase in gold prices appears to be influencing investment demand in India in recent months as well,” he added. “Retail investors have increased their allocation to financial gold compared with equities over the past two months.”
Instead of purchasing gold jewllery, Prasad recommended to buy financial (ETFs) or physical (coins, bars, bricks) gold.
Risk of widening India’s CAD
An increase in Indian households’ allocation to gold over other asset classes has negative implications for the external sector, as it has the potential to widen India’s current account and trade deficits, the note added.
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