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The side effects of the remarkable surge in gold prices are boosting the net worth of households, fostering a perception that the resulting wealth effect could significantly trigger a turnaround for India’s languid consumption trajectory. Another aspect is the role of elevated gold prices in providing robust value for collateral against retail loans, serving as a separate channel to influence consumption demand. The magnitude of this effect is significant, as Indian households collectively own 24,000 tonnes of gold, accounting for 11 per cent of the world’s gold reserves in jewellery (World Gold Council). The doubling of traded gold prices would have increased their net worth to ₹324 trillion, nearly equivalent to India’s GDP, rising to 100 per cent since 2024 (see Charts 1 & 2). In the context of persistently weak consumption demand and household income conditions, such an upsurge appears as an unexpected boon. With Indian investors facing negative or flat performance of consumer companies over the past two years, it is natural for them to hope for a rebound driven by rising net worth. In this note, we examine how realistic this expectation is. The answer can be understood from a conceptual standpoint and tested through recent trends. From a conceptual standpoint, household ownership of gold stems from five factors (RBI study, 1992): generation of large market surpluses in rural areas due to increased agricultural production, unaccounted income/wealth generated mainly in the service sector (less relevant now), comparative returns on alternative financial assets like bank deposits, mutual funds, equities, and small savings schemes, and price variations of gold and other commodities. A separate study (Kannan and Dall, 2003) concluded that demand for gold has an inverse relationship with its price and is positively related to income. They found that financial wealth, driven by medium-term trends in equity prices, positively impacts gold demand, while real yields on government bonds have an inverse relationship with gold demand. Institutional demand also plays a role. Central banks in most emerging market economies (EMEs) and advanced economies either bought fresh gold stock or stopped selling existing stock following the 2008 financial crisis (Karunagaran, 2011). Central bank gold holdings have been a significant driver of global demand since 2012, becoming even more critical in the current context, with Trump 2.0 tariff policies spurring a move toward de-dollarisation, particularly led by BRICS nations. Three distinct phases Historical data over the past 22 years identifies three distinct phases associated with gold price trends, household income, and consumption: Phase 1 – 2004-2012 saw gold prices surge by 5.4x, from ₹5,600 per 10 grams to ₹30,000. Consumption rose in tandem, supported by rising income growth. During this period, inflation was also increasing. Domestic gold consumption grew from 450-500 tonnes per annum to a peak of 1,000 tonnes in 2012. Phase 2 – 2012-2018 saw a moderation in global gold prices (a 25-30 per cent decline to $1,150-1,200 per troy ounce), while domestic prices remained flat due to rupee depreciation. Gold imports for private consumption fell by 27 per cent, from 1,000 tonnes in 2012 to 730 tonnes in 2018. Income growth was moderate, and overall consumption slowed. Phase 3 – Since 2019, gold prices have surged to $4,300 (3.4x), while Indian prices quadrupled to ₹130,000 (4.2x). Conversely, gold consumption declined to 576 tonnes, down 42 per cent from 2012 and 28 per cent from the FY05 level of 800 tonnes. In 76 per cent of the past 54 quarters since 2012, consumer demand for gold has been lower than supply, with an average gap of -15 per cent since 2022. Thus, the rise in gold prices is not driven by India’s consumer demand. We map key indicators of household consumption across the three phases of gold price performance. Phase 1 exhibited strong growth in consumption of items like passenger vehicles (9 per cent CAGR), two-wheelers (11 per cent), consumer durables (13 per cent), and non-durables (6 per cent), with HUL volume growth averaging 7 per cent. However, a marked slowdown followed, particularly in Phase 3, despite gold prices rising at a 17.5 per cent CAGR. Domestic sales of PVs decelerated to 1.6 per cent CAGR in Phase 3, while two-wheelers slowed to 4.4 per cent, Consumer goods production declined by 1.2 per cent CAGR. HUL’s volume growth declined to 2.6 per cent (see Table 2). Combining the three phases, no significant positive correlation emerges between rising gold prices and aggregate consumption. The most significant relationship is with nominal and real income (see Chart3). Phase 1 was marked by a positive confluence of rising gold prices, growing gold demand, and accelerating household income. In Phases 2 and 3, gold consumption consistently declined, regardless of falling or rising gold prices. Common to both phases is the persistent lag in household income since 2012, exacerbated by the K-shaped income and consumption recovery post-Covid. Consequently, while premium products rose significantly, the value segment slowed. Real income growth RBI’s KLEMS data shows that the 5-year CAGR of real income from national gross value added (GVA) accelerated from 4.7 per cent in FY04 to a peak of 8 per cent in FY09, remaining elevated at 7.3 per cent until FY12. However, it decelerated sharply to 3.8 per cent in FY24, reflecting a post-pandemic K-shaped recovery with truncated income outcomes, declining real wages, and middle-income stress, particularly aligned with weak rural wages. The slowing household income and rising cost of living have reduced the household savings rate to 17.9 per cent of national gross disposable income (GNDI), with financial savings at 5.1 per cent. Savings in physical gold have halved to 0.2 per cent of GNDI. Thus, consumption growth is strongly tied to household income growth rather than the net worth effect. Empirical estimates of household real consumption (2008-2019) suggest that the net-worth effect has minimal impact on consumption. The central factor is real income: every 100 basis points (bps) increase in real income leads to a 65 bps increase in consumption. The impact of real returns from equity or gold prices is negative (-0.02 elasticity, statistically insignificant) (Table 1). The limited impact of the net-worth effect from rising gold prices can be attributed to several factors. First, rural households allocate a high proportion of income to consumption, so declining real income dominates consumption patterns, while rising gold value has only a notional effect unless transacted. Second, the high rural proclivity to invest in gold means steep price rises squeeze consumption. Third, money may be diverted from small businesses to gold for trading gains, reducing productive activities. As gold is a contingency asset, rising prices enable increased gold loans to buffer income distress. The last five years have seen an urban-led K-shaped recovery, with gains in the formal sector’s market share and equity investments by a small portion of households (6.5 per cent active investors, per SEBI’s latest survey). The bottom 90 per cent, including most rural households, faced slowing consumption due to declining productive employment. Recent data suggest the upper arm of the K-shaped recovery is also slowing, with companies noting an eroding middle class. Household income remains under pressure, and the post-Covid surge in urban income and compensation growth, particularly in IT and banking, has been moderating. RBI and NABARD bimonthly surveys indicate moderating household sentiment. Banking sector data shows a deceleration in retail lending, with growth slowing to 11.8 per cent in August 2025 from 25-30 per cent two years prior, possibly due to peak household debt levels (estimated at 53 per cent of disposable income in FY25E). Incremental non-mortgage lending, excluding gold loans, declined by 12 per cent in FY25 (April-August, ₹255 billion). While higher gold prices may increase the quantum of gold loans, pledging gold to support consumption largely reflects underlying household distress. In conclusion, while the surge in gold prices has significantly increased household net worth in India, it does not appear to be a catalyst for a broad-based consumption surge. The historical and empirical evidence highlights that consumption is predominantly driven by real income growth, which has been subdued in recent years, particularly in the post-Covid K-shaped recovery. The rising value of gold primarily serves as a notional wealth effect, with limited translation into actual consumption unless liquidated, often under distress. Factors such as declining household savings, moderating retail lending, and persistent income pressures further constrain consumption growth. Consequently, the expectation that spiralling gold prices will significantly boost consumption demand remains largely unfounded, with gold loans reflecting underlying economic distress rather than a robust driver of consumer spending. The writer is CEO and Co-Head of Equities & Head of Research, Systematix Group. Views are personal Published on October 27, 2025
