Is Gold Wealth?

The Economic Times newspaper published an article entitled $2.4 Trillion Worth of Gold! India’s Household Hoard is 6x Pakistan’s Economy.

Indian households hold an estimated 25,000 tons of gold worth $2.4 trillion—nearly six times Pakistan’s GDP and greater than Italy’s economy. Despite monetization challenges, high prices and strong demand keep gold central to Indian wealth.

In this article the author made a claim that ‘gold is central to Indian wealth’. I want to examine this claim here but before I do that, a couple of comments on this article.

First, what is the need of comparing the dollar value (at current market price) of India’s gold hoard with Pakistan’s economy? Why compare it with the economies of Italy or Canada? Why not compare it with the Chinese economy which is 5 times larger than the Indian economy? China is the proper denominator with which the situation of Indian gold holding can be compared. The population base of both China and India are almost the same. They both started their economic reforms almost at the same time. The Chinese gold holding (both public and private) is the same as the Indian one. Chinese central bank holds approximately 2,292–2,296 tons of gold, valued at around $242 billion USD at recent prices near $3,500 per ounce, which is far more gold than the Indian central bank RBI. RBI only holds approximately 879.59 metric tons of gold. Chinese citizens hold approximately 20,000 – 23,000 tons of gold (including jewelry, bars, and coins), which is approximately 2.5 to 2.8 trillion USD. Instead of comparing Indian gold holdings with the economy of Italy or Canada, why not compare it with China? China’s nominal GDP is approximately $19.53 trillion USD, whereas India’s is approximately $4.27 trillion USD. As the author mentioned, India’s gold hoard is nearly 56% of India’s projected FY26 nominal GDP, which is a substantial amount. China’s gold hoard is around 15% of its nominal GDP, which shows the enormous size of the Chinese GDP compared to India.

Instead of trying to score political brownie points from the Modi government by giving Indian citizens a feel good factor by comparing India with Pakistan, it would be better if we remain honest with ourselves and make a meaningful comparison with China. Why set such a low standard for comparison? If feel good factor and keeping the populace in the dark is of importance then economists can compare India with Burundi, South Sudan, or Democratic Republic of Congo! Compared to those, India is surely richer and better. But then, the feel good factor and lies are not going to feed a billion plus poor and hungry Indians.

Now let us examine the claim that this gold horde is central to Indian wealth. My short answer is: no. Gold hoard (of any country) doesn’t reflect its wealth. The private gold hoard of Indians is actually detrimental to the economic growth as I will discuss below. Let us see why.

To understand why gold is not wealth we have to understand, what is wealth. Here’s how Adam Smith (one of the founding fathers of modern economics) defined wealth (in his famous book, An Inquiry into the Nature and Causes of the Wealth of Nations) as:

the annual production and exchange of goods and services that satisfy human wants, rather than the mere accumulation of gold and silver. He states, “The annual labour of every nation is the fund of its wealth”. Smith argues that a nation’s wealth is best measured by the total value of its production—what we now call gross national product—not by its stores of precious metals.(Emphasize mine)

By claiming that gold is central to India’s wealth the author of the Economic Times article is committing a classic economic fallacy of mercantilism. A fallacy that Adam Smith tried hard to fight in his time, too.

As Smith said, production of economic goods (and services) is what constitutes wealth. Economic goods like clean nutritious food, clean drinking water, clean air, comfortable houses, shoes, computers, mobile phones, cars, clean streets, safe roads, good quality education and health system, zero corruption, more freedom for people etc. With a per capita income of approximately 2900 USD India is a dirt poor country. If we remove the income of millionaires and billionaires then the per capita income of an average India falls even lower. The income and wealth inequality in India is now higher than it was during the British Raj!

As far as gold is concerned it is money (a medium of exchange), and nothing more. In its jewelry form it is a consumer good but of no big importance. We cannot eat or drink gold. We cannot build houses of gold too! In fact, the big gold hoard of Indians is detrimental to its economic growth. Money that could have gone into investment and accumulation of more capital goods (which is what helps in producing more economics goods and services) is now locked up in this gold hoard. All the gold that is sitting in people’s houses and in secret temple store rooms is just sitting there accomplishing nothing of importance.

The reason people buy gold (and silver) in India is because their future is so uncertain. The regime uncertainty created by the government (think of sudden demonetization announcement or haphazard implementation of various policies, raging inflation, etc.) makes life difficult for ordinary people. Property rights are not secure. Any day the government will come and bulldoze your house! You have a job today, you might not tomorrow. Today you are alive, the next moment you are dead or seriously injured and crippled for life. Today you are healthy, the next moment your illness and medical bills will ruin your life. Every moment of life is a struggle. Millions of people do not know where their next breakfast or lunch/dinner will come from. Against such extreme uncertainty the only safety net is gold and silver because it is real money which will not lose its purchasing power with time like the official fiat paper currency rupee. Gold and silver are people’s insurance policy against life’s uncertainties, and that is the only reason why people buy it. Demand for gold is actually a vote against fiat currency rupee. People do not trust the rupee to hold its value so they buy gold.

Instead of being central to people’s wealth, a higher demand for gold only indicates the desperate lives of billions of Indians. It is an indication of how hard and uncertain life is.
The day life will get comfortable and the future more secure, Indians will stop buying gold, like how we see in First World developed Western countries.

Another issue to consider here is, whether this gold hoard of India will help it in accumulating wealth if tomorrow the world goes back on the gold standard or India decides to back its rupee with gold?

In a future gold standard world monetary system India’s gold hoard will not make it rich/wealthy on its own. As I discussed above, production of more consumer goods (and services) makes any country rich. Having gold hoard doesn’t mean this production will rise automatically. Because India is a poor country very likely all gold will drain out of the country quickly to pay for imports, or it will be used in consumption rather than in saving, investment, and capital accumulation. India is a net importer country, and it will need gold to pay for these imports. India’s current balance of payments is in deficit, and after independence in 1947 there were only few years when balance of payments was in surplus. The present official RBI gold reserves will only be enough to fund some 5 to 7 years of deficits as private household gold reserves are not available to fund balance of payments deficits. To use household gold the government will have to confiscate private gold!

Indian household savings (both financial and physical assets) rate is mere 18.1%. If we exclude physical assets then financial savings rate is measly 5.3%. If gold becomes a medium of exchange in any future gold monetary system then poor Indians will quickly use up their gold in buying consumption goods. According to my calculations (that I asked AI to do for me), at current gold prices it will take some 3.3 kilograms of gold to buy a house in Mumbai city at an average price of 2.7 crores for 2 BHK apartment. At this rate India’s total gold hoard of 25,000 tons can buy some 7.46 million homes. There are approximately 5 million households in Mumbai right now. India’s gold hoard will be exhausted in buying homes in Mumbai city only! Nothing will be left for saving, investment, and capital accumulation which can increase future production of consumer goods (wealth). I asked the following question to AI: Is 25,000,000 kilograms (25,000 tons) of gold is enough to buy a home for every household in Mumbai, Delhi, Kolkata, Bangalore, and Chennai at current prices? AI’s answer after all calculations was: 25,000,000 kilograms of gold is NOT enough to buy a home for every household in Mumbai, Delhi, Kolkata, Bangalore, and Chennai at current 2025 prices. You would need about 3.1 million more kilograms of gold to cover all households in just these five major cities at the average current home prices.

In conclusion, gold is neither wealth nor it can automatically increase the production of consumer goods, which is real wealth. Indians do not need more gold. They require more food, water, houses, and all other necessities. Unless the Indian economy produces more economic goods, it will remain poor. India’s 25000 tons of gold hoard only reflects its underlying problems of uncertain futures for billions of people, and their lack of trust in government and its fiat paper currency, the rupee.
If Indians are really serious about accumulating wealth then they will have to learn about those factors that can increase production of consumer goods. One way to increase production is to increase the productivity of labor and land. Labor productivity can only increase when its use is complemented by physical capital goods (think of machine and tools) and human capital (workers’ skills & knowledge). Only savings and profitable investment can help India accumulate both physical and human capital. Another factor responsible for acquiring more consumer goods is opening the borders for free foreign trade and opening the Indian economy for free trade and competition internally. Only local and foreign free trade can help fulfill the needs of Indians and make them wealthy. Until these changes are carried out, India will remain a poor country.