Is Gold Always Bold?

  •   Fri, May 02 2025
  •   By David Pinto Prabhu

May 2, 2025

From time immemorial, kingdoms & empires have fought over gold. Modern day countries have pledged gold for bailouts, technologically and militarily advanced super economies are hoarding gold and even marriages are solemnised over gold. From the court room to the board room, right down to households, there is a discussion on gold. And everyone, even if not having a flair on gold prices, seems to be have an opinion on gold with its rising prices.

Why the sudden rise?

Historically, gold has been perceived as a safe haven especially during times of uncertainties. And who better can be the brand ambassador for the current uncertainty, than the current U.S. President, Mr. Trump! But what is surprising to know is that, gold prices have been on the rise even before Mr. Trump came to power. Data shows that the Central Banks including India have been increasing the holdings in the yellow metal. The Reserve Bank of India (the Central Bank for India) had purchased 72.6 tonnes of Gold in 2024 alone, making it the third largest Central Bank purchase after Poland and Turkey. Poland leads the chart on this at 89.5 tonnes for 2024. The share of Gold in India’s foreign exchange reserves now stands at 12.80% which has almost doubled in the past 6 years. With this, the U.S. dollar’s share of global forex reserves has declined from 73% in 2001 to 58% today. A good portion of the forex reserves held by various countries has got diversified not only with other currencies but also a good amount into 1,000 tonnes of Gold! With such demand, prices have no option but to rise.


Gold is money, everything else is credit: John Pierpont Morgan

The Asian angle

In a country like India, buying of gold, apart from the Central Bank’s purchases, is more of a need-based buying of jewellery for marriages and occasions. India tops the chart for the purchase of gold jewellery for 2024, with a whopping purchase of 560 tonnes. China, comes close at 510 tonnes. On purchases of gold bars, China takes the cake with a purchase of 345 tonnes and India at 240 tonnes. If you then add Vietnam and Indonesia’s purchases, Asia itself accounted for 64.5% of global demand for gold jewellery and bullion (gold bars) in 2024. This excludes the purchases from the Central Banks.

It is recorded that Indian households have bought nearly 12,000 tonnes of gold just in the past 15 years. The World Gold Council estimates the cumulative holding by the Indian households to be 25,000 tonnes. A report by India Gold Policy Centre has stated that South Indian temples hold around 3,000 to 5,000 tonnes of gold in their vaults. If someone has to value this stockpile of 30,000 tonnes (also 14% of the World’s total) lying in households and the temples, it amounts to a staggering 3.20 trillion USD! And just for a current perspective, the Indian stock market capitalisation is valued at 4.9 trillion USD. 

Traditions

It is also observed that the demand for gold in India on account of marriages alone is roughly around 300 to 400 tonnes annually. India’s wedding industry is estimated to be 130 billion USD, where 10 million marriages are celebrated annually. Gold is also purchased on auspicious days and events. It is estimated that the sales of Gold from Patna alone was around Rs 400-450 Crores in 2024. China also has similar traditions of buying gold for marriages, anniversaries and for celebrating milestones. According to the Teochew communities in South east Asia, the groom’s family is required to buy four items of gold jewellery, a necklace, a bangle, pair earrings and a ring for the bride. This tradition is to symbolise the four corners of the roof that a husband is expected to provide.

Is Gold really a safe haven?

When we look at gold prices from 2007 to now, it is up by 298% in dollar terms. And when we look at the same in rupee terms it is at 800%. This is because the rupee (INR) has depreciated against the USD from 44 levels to 85 at present. But when one looks at the pure price movement of gold in dollar terms over the past 50 years, the image is a little different from the normal conceived image of gold. This is where one needs to sniff the data. Gold had touched 666 USD per ounce in 1980 and a good 19 years later in 1999 the price was at 255 USD per ounce. A destruction of 62%. It was able to reclaim the peak of 666 USD only in 2007. A period of 27 years from its last peak. It later went to hit 1,772 USD an ounce in 2012 only to correct by 40% and settling at 1,062 in 2015.

When we see this, it is evident that it did not make investment sense during the above period. Then why were households buying such vast amounts of gold at the drop of a hat? More than traditions, gold was also purchased by investors as a hedge against inflation and also as a harbour of safe haven during turbulent times. Many investors in India have been buying gold in the past to get a participation in non-rupee assets as gold was valued against the U.S. Dollar. Gold was also bought as a hedge against Rupee depreciation. The financial wizards had limited choices then. And sadly, Indian capital controls remain complex even till date.

When we compare the price movement of gold against equities, it is surprising to know that gold prices have witnessed a drawdown of 82% whereas equities (US equities) have suffered a maximum of 62%. Drawdown- the max fall from its peak. Hence, if someone is under the assumption that gold is a safe haven, it is time to accept that the gold also suffers volatility, in this context, more than equity. Besides, gold unlike Stocks and Bonds does not yield anything.

In spite of the booming stock markets, Indian households have allocated only 6% to equities and the share with gold is at 15%. The increased demand from gold can also add stress on the import bill. India’s net gold imports for 2024 stand out at 45 billion USD, which is 8% of its total imports.

Storage of Central Banks

On the Central Bank’s gold holdings, you will be dazed to know that Germany and few countries have stored their reserves not in their own land but far away in the U.S., in Manhattan. The Federal Reserve of New York has more than 6,000 tonnes of gold in its lockers which they do not even own. This vault is placed on a bedrock of Manhattan Island, 80 feet below street level and 50 feet below sea level. Now imagine if Germany and the U.S. turn out to be foes like they were in the early 1940’s. Will Germany’s gold lying in the U.S. really turn out to a safe haven for Germany?

Well, these are hypothetical theories at the moment. The point that I want to drive about gold is, yes, it is an investment avenue, it has delivered inflation beating returns at times, it can appreciate during turbulent times, but it cannot be considered as a safe haven at all times. It does have its share of woes and volatility just like other asset classes. By the way, imposing 245% tariffs on your trading partner was also considered hypothetical some seasons ago!

And if you are wondering if the RBI has stored all its gold in New Delhi, you will be surprised to know that close to 50% of its holdings are saved between the Bank of England and the Bank for International Settlement, Switzerland. And this is the same England, that had siphoned off more than 3 trillion USD in today’s terms, during its colonial rule over India!

Way forward

Gold does deserve a share under asset allocation. But the general belief that it can weather all seasons and can be considered as a safe haven at all times needs serious rethinking. A major portion of the gold returns for an Indian investor have come from the Rupee depreciation against the USD. It is hence prudent to have 10 to 15% of your investible funds in gold. If one has breached this threshold, it would make investment sense to trim your holdings by booking some profits. Today, one does not need to buy gold bars or jewellery to participate in the gold rally. You can buy units of gold via Mutual Funds, Exchange traded Funds where you don’t have to be worried about the storage costs and safety aspects. Moreover, the regulations require fund houses to buy 995 purity London Bullion Market Association (LBMA)-certified gold. Consult your financial advisor to know what should be your allocation in gold and which is the best option.

 

 

 
By David Pinto Prabhu
David Pinto Prabhu has graduated from St Aloysius College, Mangaluru with BCom and then PGDM from St Josephs’ College of Business Administration, Bengaluru. He has over 20 years of working experience in the field of investments. Started career with ING Investment Management (2004) and then moved to J P Morgan Asset Management (2008), and was heading South India, for the institutional business at J P Morgan Asset Management. Currently a partner at Fisdom Private Wealth and based out of Mangaluru, he is on a mission of simplifying the clutter surrounding the dynamic nature of investments. He can be contacted on LinkedIn: linkedin.com/in/david-pinto-29037a33 and Email: davidcasmir@gmail.com.
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Comment on this article

  • Joe Jacintha Dsouza, Mangalore/Bangalore

    Sat, May 03 2025

    Happy to read your article. Congratulations David. Wishing you all the best, God bless you always!

  • Anita Cordeiro, Mangalore

    Sat, May 03 2025

    Very enlightening, indeed! Thanks David for such an in-depth article and busting our myths. Feels so proud to be knowing, you are our own. Wishing you greater success in your future.

  • Natalie, Mangalore

    Sat, May 03 2025

    Awesome write up great information

  • Nicholas, Mangalore

    Sat, May 03 2025

    Great and helpful article


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