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Why the Government Does Not Wants You to Buy Physical Gold

do not buy physical gold
The tale behind human fascination towards gold does not certainly need an introduction. Starting from adorning as an exquisite jewellery to preserving it as a timeless asset of esteem value, from addressing it as a highly lucrative investment to considering it as a potential shield against adverse market fluctuations or upside down of the economy, it boasts a superfluity of advantages that can secure your future well.

Nevertheless, since every coin has two sides, investment in gold also brings a mix of both advantages and disadvantages. Considering the latter, a lot of speculations and analysis are being made till date by various market analysts, economists and surprisingly many amongst them have come with their own derived strong, pragmatic theories and findings to support their arguments or statements. Adhering the same, the Indian Government has recently been observed to take an overturned shift on gold investment by behesting or appealing the citizens not to invest in gold while considering the present economy.

Way back in 2015, PM Narendra Modi urged people to stop investing their funds in gold and rather deposit them in banks it will prove to be a productive investment in comparison to the former option. While attending the 'Digital Village' project of ICICI Group on 2nd Jan 2015, he said that "The challenge is not to rely on gold. People buy gold and they have that psychological feeling that gold is safe, secure and good for the future... the challenge for banks was to assure people that a bank account would ensure easy access to their savings whenever required,". To comprehend the scenario more clearly, let's dive deep into the statistics related to the trend of gold imports or consumption in India.

The Glory of Gold in India
India boasts a majestic, flourishing gold industry which is believed to employ more than 2.5 million people and contributes to around 30 billion dollars to the nation's economy. India's fast-growing export market of gems and jewellery is majorly led by gold. As per the report presented by FICCI and World Gold Council, the total amount of gems and jewellery constituted around 15% of the total Indian export market in 2013 in which, more than 18 billion dollars comprised of gold items only.

Surprisingly, the total demand for gold in India doesn't majorly come from domestic consumption. During 2014, the total demand for gold in India was calculated to be around 987 tonnes, whereas, its domestic consumption was limited to around 102.8 tonnes. As stated by the World Gold Council, "Over the past five years, the annual demand has averaged to 895 tonnes, equivalent to 26% of total physical demand worldwide. For many years, the most avid purchaser of gold in the world, India remains one of the leading markets for gold globally today." The import bill showed a whopping total of around 31.17 billion dollars in 2014, which further increased to a total of 34.98 billion dollars during 2015.

The Indian Government has claimed that restricting the Gold imports will prove to be a highly effective measure in reducing the annual trade deficit. Way back in 2015, the Indians were pleaded by the Government to deposit their owned physical gold in banks for an annual yield of 2.5%. They stated that the gold will be deployed for supplying to the jewellers and domestic users, thereby replacing the imports. Furthermore, to promote the movement, the Government further declared the launch of a unique gold-backed bond with an innovative, trend-setting concept that gifted a new dimension to the Gold industry. On this behalf, PM Narendra Modi said, "People will not get any gold bar but a piece of paper that will have the same value as gold. When you return that piece of paper you will get money as per the value of gold at that time. You will not need to buy gold and worry about where to keep it."

The Repercussion of Demonetization in India
Needless to say that; the completely unforeseen decision of Demonetization on 8th Nov 2016, taken by the Indian Government created tremendous ripples all across the industry. The immediate effect was; people almost rushed to purchase gold and spend their money fast. However, the situation stabilized as the Government imposed on the compulsory requirement of submitting the PAN card (Indian Permanent Account Number) details for liability purposes. Resultantly, many jewellers who were defying the rules came under severe clampdown. Eventually, a game-changing phenomenon of the ban on Gold purchase started to hover all around and this further led to the accumulation of significant amounts of gold imports by agencies. While summarizing the scenario; the hurry to invest idle cash of people and the hear sayings of a Gold ban resulted into a drastic leap in the import or demand of gold to 100 tonnes approximately in the month of November, which possibly was recorded to be the highest since 2015 as stated by Reuters. On the contrary, this same volume was not being completely absorbed because of which, a significant amount of the total imports remained as unsold which, further resulted in declining levels of gold imports in the consequent months. Gold demand in India tumbled to around 22% during 2016 i.e; from 863 tonnes in the year 2015 to 674 tonnes in 2016.

The gold demand has further greatly affected by the various laws recently being passed by the federal government which, is considered to have discouraged many consumers from buying gold as per the Managing Director of World Gold Council. Furthermore, the Government also declared a ban on the amount of gold product exports that are noted to be with a 22-carat purity level to close the loopholes related with taxes imposed on various items including jewelry, medals and coins.

The Final Note
Demand for Gold is inevitable, age-old and ingrained into our roots. Irrespective of the myriad of objective-oriented, well-planned initiatives undertaken by the Indian Government, the purchasers are finding different types of methods to buy physical gold. Thus, though the initial post-demonetization days encountered the jewellery shops to be closed, however, the market slowly progressed over the gradual passage of time and still is on its way.
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