It has become a pattern now. For some reason — a government action or international prices or a combination — gold imports fall and one reads news about how this will be a relief to economy. And then promptly comes the news that retail gold sales are up. The gold bug that infected our countrymen centuries ago is still in effect, and nothing the government throws at it seems to calm it down.
Over the last month, falling gold prices saw a reduction in retail sales, but as soon as there was an upward move in the prices last week, retailers reported a sharp uptick in sales. Apparently, everyone was just waiting for prices to fall before buying yet more.
There was a lot of talk about how the government has been raising the import duty on gold to curb consumption. Actually, throughout the time that duties were being raised, the international price of gold was falling much faster than the rise in duties. So the hike in duty rates had probably more to do with preserving revenues than curbing consumption.
In any case, the behaviour of Indian gold consumers seems immune to the the normal law of price and demand or investor behaviour. Basically, people believe very strongly that the price of gold will go on rising sharply and that any fall is temporary and a precursor to a buying opportunity.
Unfortunately for them, there are strong signs that this is not true. The gold price cycle is clearly a side-effect of the huge liquidity glut over the last few years. This hasn’t changed the fact that gold is intrinsically useless, doesn’t earn anything and does not submit to any objective way of valuation.
Committing large parts of one’s savings to it doesn’t make sense, no matter how much it conforms to habit and custom. This is one piece of official government advice that investors should heed: don’t buy gold.