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Indian brides-to-be hold heavy gold chokers against their slim throats and squeeze gold bangles onto their wrists at Tribhovandas Bhimji Zaveri, a three-story Delhi jeweler whose fountain and pink marble floors hint at India's passion for gold. Indians spend about $8 billion a year on the precious metal, which amounts to 2 percent of the nation's income and one fifth of all the gold sold worldwide. Since most Indian gold purchases go to adorn brides or to fill their dowries, wedding fashion in Mumbai moves the price of gold in London. So gold bulls, beware. At a time when global traders are rushing into the safe haven of gold, Indians are rushing out.
For years India has been passing laws to reform the oppressive tradition of gold dowries and its offshoot: a massive black market with retarding effects on the national economy. Now changing fashion is achieving what changing the law could not. Indian gold sales peaked in 1998 and dropped 36 percent in the first nine months of 2002, as an increasingly sophisticated middle class gives up gold wedding gifts in favor of mobile phones, Honda scooters, even Western M.B.A.s for the groom. Global gold traders last year commissioned a study of the Indian market, which found that urbanization, rising literacy, female emancipation and increasingly sound investment options all bode ill for gold. Coauthor Gary Mead, an analyst at Virtual Metals of London, says we may be seeing the death throes of India's ancient love affair with gold, "the last twitch of the dinosaur tail." If he's right, investors betting on a long bull run for the price of gold could find themselves in for a surprise.
Historically, Indians have had good reasons for their passion. Durable and relatively liquid, gold is convenient for rural investors, most of whom spend their days in the fields. Gold also makes sense in a fiscally conservative country with a high savings rate (more than 20 percent of GDP), an unpredictable currency and few other options. That is changing, slowly. Since the economic liberalization of the early '90s, public markets for stocks and bonds have taken hold. Their growth has been retarded by scandal, the Indian mutual-fund industry is still in its infancy and only 11 percent of workers have a retirement fund. But once the markets clean up their act, says Mead, they could attract a far greater share of Indian savings and place "another nail in gold's coffin."
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Indians have plenty of reason to wean themselves off gold, too. Gold dowries have spawned a kind of underground economy, complete with undercurrents of violence and extortion, that distorts the Indian market. Hundreds of thousands of small-time gold jewelers effectively serve as what Mitsui Precious Metals analyst Andy Smith calls "a shadow banking system" for rural populations. Frequently catering to an illiterate clientele, jewelers often barter old gold for new, dispensing with the formalities of a paper trail. These transactions siphon off capital from the formal (and taxable) economy, where it could be used to build new factories that create jobs. The upshot, says Smith: "Gold is a growth decelerator."
India banned dowries in 1961, hoping to reduce the drain on family incomes and the terrifying frequency of female infanticide --and abortion, which is often committed by families fearing the future price of a dowry. But many traditional parents would still rather pay for a dowry than for education in a coed university, "so they can bring up their daughter in a conservative setting," says economist Bishaka Sen. Parents of the bride are also aware that grooms and their families often mistreat--even murder--wives who arrive with paltry dowries. So they stretch to pay as much as possible, as a kind of life insurance.
What's changing now are the ingredients of the dowries. Their size has been increasing as Indians grow wealthier: the World Bank's Vijayendra Rao estimates that families can now spend as much as seven times their annual household income on a daughter's dowry and wedding. Over the last two generations, he figures, dowries have increased in value tenfold in some regions. But their gold content is shrinking, from perhaps 60 percent in the 1960s to between 25 and 40 percent today. Instead, as India opens to a wider range of foreign imports, bridal families have a greater variety of goods to choose from.
At the same time, the government is taking steps to reform the gold market. One 1999 scheme offered depositors tax-free interest of 3 to 4 percent for their jewelry. (It fizzled: banks found it unprofitable, and customers could get better interest rates elsewhere.) Earlier this year, Finance Minister Jaswant Singh tried to remove customs duties on numbered gold bars, but not on the unmarked, untraceable tola bar, the traditional unit of the Indian gold trade. The idea: to cut down on smuggling and make it easier to regulate the trade.
No one expects the Indian demand for gold to evaporate quickly, despite the dramatic fall in sales last year. (That was exaggerated by unusual factors, like a particularly harsh monsoon season.) But the trend is obvious--and positive. India's embrace of gold had its roots in poverty, in a sense that society is as fickle as nature, and that no official store of value--cash, stocks or bonds--could be as solid as precious metal. To move away from gold is, then, a vote of confidence. Declining sales may be bad news for the price of gold, but they're good news for the future of India.
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