Gold-eagle explains why Indians love gold.
(emphasis mine) [my comment]
Why Indians Love Gold
From time immemorial Indians have been in love with Gold. The predominant Hindu population finds mention of gold as a commodity of immense value in their religious books. Some of these religious books like the "Vedas, Puranas, Upnishads" are believed to date back a few hundred thousand years. The revered "GITA" is believed to be a sermon by Lord Sri Krishna given more than 5000 years back. In most religious books there is mention of gold as a metal of immense value. Hindus believe that Gold is a metal of demi-Gods and monarchs.
From ancient times Gold (and gold jewelry) has enjoyed safe-heaven status. In India Gold continues to enjoy safe heaven status even today. Gold jewelry is worn by all women irrespective of their religious beliefs. A large number of Indian men also wear Gold jewelry as neck chains, bracelets, and rings (on fingers). Gold jewelry is popular among Indians for the following reasons.
1) Jewelry is worn for ornamental value on all social functions, festivals and celebrations.
2) At one point in time there was 97% income tax in India. This resulted in large scale tax evasion. Large population spread over a significant area and lack of adequate computerization are some other reasons for tax evasion. The tax reforms of the last several years have indeed reduced the level of evasion. Still a lot remains to be done. It is believed that there is a parallel economy running in the country. The cash component of the unaccounted wealth can not be kept in Banks (if kept in Banks it would have to be accounted). This unaccounted wealth can not be kept in safe deposit vaults as it has to be hidden from the tax authorities. Gold jewelry is the most convenient option as it occupies very little space (so easy to hide) and does not have the risk of being damaged during storage.
3) The Indian rupee is not convertible on capital account. This means that it is illegal for an Indian (resident in India) to keep any foreign currency in his possession or in his portfolio. Foreign exchange regulation act (FERA) and conservation of foreign exchange and preservation of smuggling activities act (COFEPOSA) prescribe deterrent punishments for violators (including detention for long periods without bail or trial). It is also illegal to keep Gold in unworked form (pure gold). As a result, in the prevalent scenario, Gold jewelry is the only way to protect against depreciation of Indian rupee against US$.
4) A large population in India lives in villages. A large number of very poor people do not have proper houses to live. These poor people have very little assets. Whatever little they have they must keep in their possession 24 hours a day (as they do not even have a house to keep their belongings). Gold jewelry worn on their self is the only option. When in crisis they mortgage it or sell it. Floods and drought force many people living in villages to flee to a safer place. It is easy to carry gold jewelry while fleeing in distress.
5) In the long term the Indian rupee price of Gold has been in an up-trend. Inflation has continuously, year after year, eroded the value of currency. Real estate has been the best bet. Gold jewelry has been the next best option. Despite the fact that $ price of Gold has been in a bear trend, Indians continue to believe that Gold is a hedge against inflation. The following is the Indian rupee Gold price chart from 1993 onwards. The downward price movement from 1996 has been for two reasons. Firstly, $ price of Gold has gone down by 25% in the same period. Secondly, the Indian Gold import regulations have been liberalized. Some benefits of liberalization have been passed on to the consumers in the form of lower rupee prices.
6) Due to import duty and other limitation on imports, the price of Gold in India is always higher than the international price. Therefore, India continues to import Gold year after year.
Yearly Indian Gold imports
India as a country is heavily long gold
Based on India's yearly gold imports, there should be over 10,000 tons of gold circulating in India in the form of jewelry. These 10,000 tons of jewelry is worth about $381 billion at $1080/oz. This huge supply of gold jewelry acts as a second unofficial currency in India.
The appreciation of gold will create tremendous inflation in India!
When global gold prices soar, gold owners in India (nearly the entire population) are suddenly going to find themselves much richer. With their new found wealth and greatly increased purchasing power, they will be willing to pay a lot more for what they want (food, clothes, etc...). So rising gold prices are going to result in out of control inflation in India, with will lead to a surge of raw material imports (as is already happening in China).
Implications are staggering
Consider these two facts:
1) Both gold and the yuan are undervalued by over 40%.
2) China's population is 1.3 billion and India's population is 1.2 billion. Together, China and India make up 38.5 percent of the world's 6.5 billion people.
As the dollar collapses and gold/yuan appreciate, India's and China's enormous populations are going to start sucking up the world's raw goods (food, energy, metals) with their increased purchasing power.