Independent Research and Policy Advocacy

Does financial and macro policy explain household investment in gold?

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Gold dominates household portfolios in India. This has been labelled as irrational behaviour by financially illiterate households. In this paper, we show that household preference towards gold is not irrational in the context of the Indian financial and macroeconomic environment which includes high inflation, financial repression, and capital controls. We use data from June 1999-March 2021 and find that (1) a depreciating currency has helped gold returns; (2) gold has consistently beaten inflation and provided real returns, (3) been a hedge and a weak safe-haven against the domestic equity market; (4) has outperformed fixed-deposits which have low interest rates; and (5) has allowed international diversification. If policy has to channel household savings to more productive uses, it has to confront the underlying issues in the macroeconomic environment which make gold a preferred investment choice.

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