Last night CBS' 60 Minutes aired a great segment on India's penchant for buying gold. I've written a few thoughts below, but first watch the segment:
First, here are a few notes I took from the video:
1.2 billion people in India. 10 million weddings each year in India. Half of the gold bought in India is jewelry for weddings. In India, a family without gold is an "incomplete family."
Indian households save about 30% of their income compared to Americans who save about 5%.
The tradition that a bride's parents will give her gold is a financial burden to some families.
Gold is so important to the lives of Indians that the poor can now get financing for it.
The World Gold Council is funded by a group of mining companies. Its representative in India created the program to help India's poor buy gold.
Q: How can you be both frugal and conservative yet be willing to spend thousands of dollars on gold?
A: When Indians buy gold, they don't think they're spending money. In their minds, that is a savings. That purchase of gold is going to your savings account. It's not an expense, it's an investment.
Indians believe the price of gold will continue rising. It is impossible to tell an Indian consumer that the price of gold will fall, because the belief that gold will continue rising is backed by its past performance.
To give you an idea of why Indians might view gold's past performance differently than we do, here are two gold charts covering the same period, 1971-2004. The first is in dollars and the second is in rupees.
Gold in India is more than just a store of value. Gold is a visible status symbol of such cultural importance that demand for it apparently exceeds net-production (savings). Some are even willing to borrow money to look like Mr. T, and the mining industry supports this.
To put this in perspective on an aggregated basis, India is importing around $34B in physical gold while running a $150B overall trade deficit. And the trade deficit is still growing, projected to reach maybe $160B this year.
India gold import bill may touch $100 bn
New Delhi, Mon Feb 06 2012
The report said that at these levels, "gold imports are a huge burden on the balance of payments and accentuates the current account deficit".
According to RBI, the current account deficit is a cause of concern because of inelastic gold and oil demand, it said.
With the government increasing import and excise duties on gold and silver, both commodities are set to cost more.
Terming the current gold import as huge burden on the balance of payments, the chamber has urged the government to encourage formal financial instruments to make the investment more productive.
"India's gold imports are unsustainable and the government should encourage channelising savings in formal financial instruments to increase productive capacity of the economy," it said.
It said efforts must be made to introduce more financial saving instruments and extensive education campaigns should be undertaken - particularly in rural areas - to minimise propensity towards gold.
The report said that post offices should be used to sell such government guaranteed instruments to extend their reach throughout the country.
Being the largest importer of gold in the world, India accounts for nearly one-third of the annual demand with import bill rising from USD 4.1 billion in 2001-02 to USD 33.8 billion in 2010-11, it said.
Rupee appreciates for 6th consecutive day on rising inflows, more gains seen
Reuters Jan 19, 2012
The main issue for the rupee has been the financing of its external obligations, including the trade deficit, said Daniel Hui, senior foreign exchange strategist at HSBC in Hong Kong.
India's trade gap widened to $43.9 billion in the September quarter from $37 billion a year earlier, while the current account deficit was little changed at $16.9 billion.
India is the biggest consumer of bullion and the metal, along with crude oil, forms a major chunk of the country's massive import bill.
Foreign institutional investors bought about $3 billion of Indian debt and moved $854 million into shares since the new year began, data from the market regulator showed on Wednesday.
India Trade Deficit Widens as Import Growth Outpaces Exports
February 09, 2012, 9:59 AM EST
India’s trade deficit widened to a three-month high in January as import growth outpaced the climb in exports, the top bureaucrat in the commerce ministry said.
A trade gap Khullar said may reach $160 billion in the current financial year threatens to revive pressure on the rupee after it tumbled the most in Asia last year.
India facing serious balance of trade problem
9 Dec, 2011
NEW DELHI: India is facing a serious balance of trade problem, Trade Secretary Rahul Khullar said on Friday, as export figures so far in the current fiscal year have been overestimated by $9 billion.
India's trade deficit for the 2011/12 fiscal year is seen in the range of $155 billion to $160 billion, he said
Is it possible to buy too much gold?
Interesting question, huh? It seems that all the gold buying in India is contributing to a balance of payments problem, a current account deficit, and a currency overvaluation problem. No wonder they raised the import duty on gold! What's interesting about this situation is that India had a balance of payments problem back in 1991 with similar symptoms.
This is just some food for thought and discussion, but it's also quite a gold story! From Wikipedia:
1991 India economic crisis
By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.
The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.   
The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.
In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value.However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (July 1 and July 3, 1991) against major currencies.
With India’s foreign exchange reserves at $1.2 billion in January 1991 and depleted by half by June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks way from defaulting on its external balance of payment obligations.
The caretaker government in India headed by Prime Minister Chandra Sekhar Singh's immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million. National sentiments were outraged and there was public outcry when it was learned that the government had pledged the country's entire gold reserves against the loan. Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed. A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber. The Chandra Shekhar government had collapsed a few months after having authorized the airlift. The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.
Here's the source of that fun van story:
"I have a very deep belief that Cabinet posts should be filled with politicians unless the economy is in serious meltdown, as it was in 1991, when Manmohan became finance minister," he explained.
"That was a time when nobody was going to give India any money. People forget that we had to pawn our entire gold stock. Normally when you have gold stock, the International Monetary Fund accepts that that gold stock is there, and gives you money against it. India had to physically move the gold stock out of India, abroad. I'm informed, by very, very reliable sources, that the van taking the gold to the airport broke down, and there was total panic."
Desai used this point to illustrate how far India had come economically in such a short span of time. Now, he argued, India is better prepared to handle economic downturns, even ones as severe as the current ongoing global financial crisis.
And then, of course, India bought back its 67 tonnes (and then some) from the IMF in 2009:
IMF Sells Gold to India, First Sale in Nine Years
November 3, 2009
The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.
The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call. Gold for immediate delivery gained 0.2 percent.
“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”
The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.
Proceeds from the sales and other IMF resources as well as individual contributors would help pay for discounted interest rates on loans to low-income countries, the IMF said in July. It plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3 tons the IMF agreed to sell amount to one-eighth of its stockpile.
“This transaction is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the fund’s finances on a sound long-term footing and enable us to step up much-needed concession lending to the poorest countries,” IMF Managing Director Dominique Strauss- Kahn said in an e-mailed statement.
The gold purchase was done as part of Reserve Bank’s foreign exchange reserves management operations, the central bank said in a statement on its Web site today.
India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.
“There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential,” Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt. said in Mumbai. “The Reserve Bank of India gold purchase is a clear reflection of this belief.”
Today India has 557.7 tonnes of official gold reserves, valued at more than $30B. Before the 2009 IMF sale it had 357.7 tonnes. India's total foreign exchange reserves now stand at $296B, ranking it 9th in the world with China at #1.
A Few Thoughts
It occurs to me that Indian savers are saving at full capacity and then some; call it the savings rate ceiling. The problem is that Indians like physical gold. You don't see much paper gold at those weddings, do you?
Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms. In other words, gold flow by volume should be observed to decline as the price rises while gold flow by value might remain steady. Yet India's gold intake has risen from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in currency terms at the same time as the price of gold in dollars rose only around 600%. And this while running a trade deficit:
India's Balance of Trade since 2002
This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess it's a good thing there are only 1.2 billion Indians.