In emerging markets, gold’s drop is just another reason to buy

Gold prices have continued to fall from record highs, but thirst for the yellow metal in volatile emerging economies remains insatiable.

Across South and Southeast Asia economic growth has slowed, currencies have crashed and inflation is rising. For many in these regions, gold remains the preferred way to preserve savings.

Nowhere is that more clear than in India, which has a centuries-long tradition of hoarding savings in gold, associating the metal with the four-handed goddess of wealth and adorning brides with heavy gold jewellery. As gold prices dropped from previous highs of $1,900 (U.S.) an ounce to less than $1,200 by late spring, Indians imported roughly 300 tonnes in April and May alone. The outflow of capital has pushed India's current account deficit higher and prompted the Indian government to restrict gold imports and raise duties to a record 10 per cent.

But even if those measures reduced official gold imports, demand has not slackened and has perhaps even gained more urgency as India's economy stagnates and people turn to gold instead of the country's suffering currency. India's rupee has fallen more than 20 per cent against the U.S. dollar since February, 2012. It now takes 62.6 rupees to buy a greenback, compared with 48.7 rupees back then.

Some fear further government efforts to stem gold inflows. But illegal imports, mainly from the gold hub of Dubai, have increased – which explains why, on Tuesday, maintenance staff cleaning a Jet Airways plane that landed in Calcutta discovered two lunch boxes hidden in the bathrooms with 12 gold bars in each, for a total value of roughly $1.2-million.

"People started feeling it was more secure to have gold and then the gold prices dropped" and purchases soared, said Ashok Minawala, a director with the Mumbai-based All India Gems and Jewellery Trade Federation. "Money was never trusted. It was gold that was trusted."

In South Asian culture, gold is incredibly important. The metal is given as a gift to celebrate births and weddings, it usually forms part of an Indian bride's dowry and it constitutes a large part of the wealth passed from one generation to the next. Historically, farmers and others in economically vulnerable situations kept their savings in gold, in case they had to migrate suddenly. In modern times, cultural ties still play an integral role in gold buying, but many also view gold as a surer way to get strong returns than investing cash in equity markets or savings accounts.

Paula Gomes, who lives in Brampton, Ont., and grew up in Dubai, but was born in gold-loving Bangladesh and is set to marry an Indian-born man next year, is preparing herself to wear the heavy gold bangles, earrings and necklaces her mother has bought over the years and stored away. "Gold always seemed to be going up in price; it rarely comes down – or not as drastically as some currencies do," said Ms. Gomes, 29. "My parents, when they lived in Dubai, they would have cash lying around and instead of putting it into savings, they would go and buy gold with it."

Across South and Southeast Asia, though, there are additional reasons to find security in gold. Over the summer, emerging market currencies, bonds and stocks took a heavy hit when then-U.S. Federal Reserve Board chairman Ben Bernanke hinted the Fed would slow down its stimulus program – a decision that came just as many emerging markets and commodity-exporting countries were already seeing slowing growth from declining demand in China. The Indian rupee and Indonesian rupiah led currency declines as investors pulled capital out of emerging markets. Gold was weak again Wednesday as the Fed signalled possible stimulus reduction in the coming months.

In India's case, domestic inflation caused by government spending ahead of next year's election, a rising current-accounts deficit and gold-buying spurred by falling prices have led the Indian government to restrict imports. A complicated government scheme, where 80 per cent of the gold imported could be used domestically but 20 per cent had to be exported, led to confusion, and the flow of consumer gold purchases slowed by 32 per cent year-over-year in the third quarter, according to the World Gold Council. But the council's statistics showed continued growth in China, up 18 per cent compared with the same period last year; in Hong Kong, up 28 per cent; in Vietnam, up 14 per cent; Thailand, up 57 per cent; and Indonesia, up 19 per cent.

When Sachin Arora, who runs Sona Chandi Jewellers in Toronto's so-called India Bazaar, married his wife Czaee in 2009, she was bedecked in gold bangles and necklaces, as well as a traditional red Indian wedding dress. Most of that jewellery is now sitting in a safety deposit box, "which is where a lot of this stuff ends up," he said.

"Most of the wedding jewellery is worn once," said Mr. Arora, 33. "The stuff is so big and gawdy. You would look so crazy walking down the street in something like that here. In India, everybody wears gold out and about. It's not like here, where people wear a couple of grams, invisible floating chains, that sort of thing. There, people can wear 150 grams."