Quotes of the Day

The shop floor of NAC Jewellers, a store in the South Indian city of Madras, is full of exquisitely wrought necklaces in gold and silver, but the prize possession of the owners is a photograph that hangs upstairs in a small office. It shows a tall crown studded with 4,000 diamonds and made from seven kilograms of gold. Four craftsmen from NAC Jewellers spent six months making the crown, at a cost of about $700,000. It now rests on a statue of the goddess Padmavathi Devi at the Tiruchanur Shrine in South India. Anantha Padmanaban, a partner of NAC Jewellers, proudly shows off a photo album full of snapshots of the work his shop has done for other Hindu shrines: a gold-plated archway for the temple at Guruvayur, a silver crown for the god Kubera at Badrinath, and gold and silver ornamentation for numerous other temples. All through India, Padmanaban says, famous temples are replacing the silver plating on their idols with gold, and smaller shrines are replacing copper deities with silver ones. "People in India have more money now," Padmanaban says, "and the result is that our temples are being covered in gold and silver."

The gilding of the nation's temples is an aspect of one of mankind's great investment obsessions: the Indian love of gold. The country buys at least one-fifth of the global gold supply each year, making it the world's largest consumer of the metal. Experts believe that 15,000 to 20,000 tons of bars, ingots and jewelry is locked up in India's bank vaults and household safes. Indians are furiously adding to that horde. The World Gold Council estimates gold buying in India was up nearly 33% to 850 tons in 2005. The increase is all the more remarkable given the metal's surging price—gold hit a 24-year high of $541.20 an ounce on Jan. 6—due in part to anxieties about terrorism, the war in Iraq and the value of the U.S. dollar. Although not all the gold imported into India is for domestic consumption—some will be made into jewelry and exported—it's clear that India's gold appetite has not been markedly diminished even by sharply higher prices. The question is, why are Indians still buying?

In many ways, gold lust is a relic of the bad old India—an India of weak investor rights and shaky financial systems, where people distrusted banks and the stock market and preferred to store their wealth in tangible assets, chiefly gold and property. The recent economic boom has given Indians a range of sophisticated and relatively secure financial instruments: mutual funds, stocks, bonds, even abstract art. Richer Indians are, indeed, diversifying their investments. "At the top end of society, yes, [gold] consumption is beginning to decrease," says K. Shivram, a vice president of the World Gold Council in Madras. The current surge in demand is being driven by the middle class and even by the poor—evidence of an economic revolution taking place at the lower levels of Indian society.

Although India's current economic boom has been criticized for unevenly benefiting the rich, new wealth is percolating down in many parts of the country to newly empowered members of the working class such as Padma Kondababu, a 40-year-old maid in Madras. The first woman in her family to work outside the home, Kondababu makes $85 a month, a good salary by Indian standards. Whatever she can save, she says, she uses to buy gold, sometimes even in $12 installments—enough for tiny stud earrings. "It's a matter of pride for people like me to buy gold," she says. "Gold used to be a few hundred rupees for a sovereign [a measure of eight grams] in the time of our parents, and yet they couldn't dream of buying it. Now it's six thousand rupees for a sovereign, and still we have the money to buy gold."

It's no coincidence that consumption is highest in the south of India, which has in recent years seen some of the fastest economic growth and the most thorough dispersion of wealth to villages and small cities. The southern state of Kerala, not far from Madras, is full of billboards advertising gold jewelry. At most local weddings, the bride is expected to turn up covered in gold necklaces, bangles, and earrings. Ambika Menon, a Kerala social worker, says that the gold obsession is a manifestation of change. New money is breaking down old hierarchies and caste distinctions. "Putting gold on your daughter at her wedding is a way of announcing, 'I've arrived in society. I'm someone important,'" Menon says.

But the financial burden can be too much. "Sometimes families go into debt to buy this gold for the weddings," says Kondababu. "Sometimes families get broken up by gold." Economists argue that the gold bug has other pernicious effects. If the money used to buy gold was invested in banks or stocks, rather than being locked up in a non-productive asset, it would boost India's GDP significantly, they say. But old ways of thinking die hard. Gold is seen by many as a safe haven in an uncertain world. "So many banks fail and close their doors, and ordinary people get hurt when that happens," says Jhansi Rani, a schoolteacher in Madras, pointing out the case of a close relative who had deposited his pension money in a private bank, only to see it close down suddenly and find that the funds had, apparently, disappeared.

Yet despite the current boom, the number of people who see gold as a sound investment may be dwindling. The recent surge in bullion prices is keeping some Indians away from the gold stores, even though the wedding season, traditionally a time of heavy buying, has started, says Padmanaban, the Madras jewelry-store owner. "People have just stopped coming for two, three weeks," he says. "But in the end, they will accept this price. They have no other choice. They must buy gold for weddings." Won't Indians stop buying once they begin to understand they can get better returns in stocks and mutual funds? Sitting under a portrait of the seven-kilogram crown of gold that his shop crafted for the goddess Padmavathi Devi, Padmanaban begins to rock with laughter. "It may happen, but it'll take a hundred years."

• Aravind Adiga | Madras
• Indians have long preferred to store their wealth in gold, and despite the precious metal’s precipitous price rise, their appetite for it is only increasing as the nation grows richer