Inflation has taken the wind out of most savings avenues for Indians in the last five years. Equities, debt, small savings, hardly any avenue has consistently beaten inflation. But one asset which has proved to be an exception to this trend is gold.

With global gold prices soaring and the rupee depreciation adding to returns for Indian investors, gold has effortlessly trounced most other investment options in recent years.

Gold for instance has delivered a 24 per cent return over a five-year period and 20 per cent over a 10-year horizon, beating equities which generated 4 and 19 per cent respectively over the same time frames. Needless to say, gold beat bonds and gilts too.

That is good news for Indian investors who have consistently raised their allocations to gold, to the disadvantage of other investment avenues in recent years.

11 times more than equity

A recent study by Morgan Stanley (Alphawise series) notes that over the past 10 years, Indian household gold consumption has increased at a compounded annual growth rate of 21 per cent.

The report also notes that gold represented 10 per cent of total household savings in 2011, with private ownership in the country totalling $1 trillion. Over the past three years, gold investments have exceeded equity savings by 11 times.

Gold consumption accounted for 2.3 per cent of India’s GDP in FY2012 and imports are estimated at 72 per cent of India’s current account deficit.

Households that bought gold as an investment have cited expected returns and safety of the asset as the key factors that influenced their decision. The ‘investment’ preference for gold is evident from the fact that there has been strong demand for gold bars and coins, which accounted for 39 per cent of overall purchases of the precious metal in 2011.

In 2012, the demand for gold bars is likely to increase, driven largely by urban households, though rural households will prefer jewellery. According to the report, rising income is a big driver of the growing share of gold bars in the holding pattern.

Rural versus urban

Will higher gold prices deter fresh purchases? In rural India, it may not, as gold purchases were motivated mainly by ‘life events’. In fact, according to the report, gold purchases in rural India were mainly for life events, whereas the demand drivers in urban India were divided between investment and life events.

The study says 35 per cent of gold purchases in the last 12 months were for life events, whereas 20 per cent was a targeted investment and 16 per cent was aimed as a back-up for bad times.

Furthermore, 15 per cent of the buying was for gifting on events. Another eight per cent was impulse buying, while the remaining six per cent was driven by households’ fondness for gold.

The study suggests that the share of gold demand for life events will increase to 50 per cent in 2012, driven by rural India. A related finding is that, as gold prices rise Indian households tend to reduce the volumes of gold bought, but not the value.

Monetising gold

Mushrooming gold loan companies have also opened up an avenue for households to unlock the value of their gold holdings as prices of the precious metal rise. The report found that around 13 per cent of Indian households have opted for gold loans, with 32 million households taking out fresh loans in the 12 months to May 2012.

According to Crisil, organised sector lending against gold amounts to about Rs 97,000 crore. The rate of interest on these loans is 15-20 per cent.

While only 12 per cent of urban households opted for gold loans during the period, 15 per cent of rural households mortgaged their gold holdings. The report suggests that 60 per cent of rural households chose the unorganised sector, usually their local jeweller, for gold loans, whereas banks are preferred by urban households.

In rural India, gold loans are usually raised to fund farming activities, whereas in urban India, the primary consideration is the purchase of property.