Gold as Asset Class India
Gold holds a unique position in India's investment landscape, driven by deep cultural affinity, its use as collateral and dowry, and its perceived role as an inflation hedge and crisis asset, with India consistently ranking among the world's largest gold consumers and the Sovereign Gold Bond scheme providing a financial alternative to physical ownership.
India's relationship with gold spans thousands of years, with the metal central to religious ceremonies, wedding traditions, and the cultural identity of households across income levels. India consistently imports 700 to 900 tonnes of gold annually, accounting for 20 to 25 percent of global gold demand and creating a structural current account drain that RBI and government policy periodically tried to mitigate.
From a financial perspective, gold served multiple functions in Indian households simultaneously. As a store of value, it preserved purchasing power across decades when currency devaluation was significant. As collateral, it provided credit access through gold loans even for households without formal banking relationships. As an inheritance vehicle, it facilitated intergenerational wealth transfer without formality. And as a crisis asset, it tended to hold or increase in value when equity markets fell, providing portfolio diversification.
Historically, gold delivered CAGR of 10 to 13 percent in rupee terms over 20-year periods, driven partly by the structural depreciation of the rupee against the US dollar and partly by the global supply-demand dynamics of the metal. However, over bull equity cycles, equity returns in India meaningfully exceeded gold returns, and gold underperformed during prolonged low-inflation, high-growth environments.
The government launched the Sovereign Gold Bond scheme in 2015 as a financial alternative to physical gold ownership. SGBs offered the same rupee return from gold price movement, added a 2.5 percent annual interest income, and provided tax-free capital gains if held to the eight-year maturity. This made SGBs financially superior to physical gold, which incurred storage, making charges, and hallmarking costs while generating no income. The scheme successfully attracted a portion of incremental gold investment into financial instruments.
Gold ETFs and gold fund of funds provided another route to electronic gold exposure without the spread between buy and sell prices typical of physical jewellery. For portfolio construction, financial planners in India often recommended a 5 to 10 percent allocation to gold as a hedge against tail risks, though the appropriate allocation depended heavily on an investor's overall asset mix, time horizon, and exposure to the rupee-dollar exchange rate.