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Festival without gold

This Diwali, take a break from tradition and cast a sceptical look at gold. Here's why

'Sona hee hai, koi fizool kharchee thodey naa hai', says the doting husband in the TV advertisement for Tanishq gold jewellery, while Diwali crackers can be heard in the background. 'It's just gold, not a waste of money'.

It's the season for buying gold. Unfortunately. I'll hasten to add that there's nothing unfortunate about the season. I expect it to be as auspicious and happy as any festival season in the past. However, it's the gold-buying aspect of the Diwali season that could become a problem. Gold and Diwali are intricately related and even in economically marginal times such as these, the idea of buying gold is an easy sell. After all, you may have resolved not to waste money this Diwali, but as the man says in the ad, buying gold is not a waste of money. Implying that it's actually an investment. When you combine it with the enormous social and cultural affinity that we Indians have built up for gold over centuries past, it's an irresistible combination.

And that's the problem. In the last ten years, gold has doubtlessly been a great investment. In domestic Indian prices, if you had bought some gold each Diwali over the last ten years, then these are the gains you would have seen by the next Diwali: 9.3 per cent, 11.7 per cent, 8.0 per cent, 26.6 per cent, 11.5 per cent, 32.7 per cent, 23.5 per cent, 22.8 per cent, 36.7 per cent, 16.5 per cent. Compounded, the total gains are 670 per cent.

It's a matchless record among all kinds of investments. In particular, the record from 2009 to 2011 has given gold buying the kind of cachet that it hasn't had for a generation in India. Sure, the stock markets gained more from 2002 to 2008, but the kind of crash they had after that disproves the point. Moreover, outside a select set, there are very few people who think that they can reliably extract the maximum possible gains from stocks. Gains from gold, on the other hand, seem there for the taking. As the cliche goes, it's just money lying on the table, waiting to be picked up. Anyone could have made these kinds of returns, and many did.

But that was the past. The question that savers need to ask themselves is, "How likely is it that this run of unprecedented returns in gold will continue"? Or, let me put it this way, "How likely is it that 10 grams of gold will cost Rs 2 lakh in 2022"? My answer to that question always has been, 'Not very'.

As has been pointed out often, gold is an unproductive asset. Unlike stocks or bonds, it's a type of asset whose value depends on nothing but a shared belief that that value will rise and keep rising. However, this apparently irrational gold boom has gone on long enough for it to shake the faith of a lot of people in the basic uselessness of gold. There's an old saying in investment, which is often said in irony, 'this time it's different'.

However, one of the things that really is different this time is the deep commitment shown by the big central banks of the world to not let asset prices fall. Here's what Ben Bernanke said a month ago: "if people feel that their financial situation is better because their 401k (investments) looks better or for whatever reason... they are more willing to go out and spend, and that's going to provide demand that firms need in order to be willing to hire and to invest."

That's what it has come down to. Instead of the financial markets being a reflection of the real economy, this approach hopes to rig the financial markets so that, hopefully, their rise might somehow become a self-justifying phenomenon. In other words, all rationality might have exited from the price of gold, and indeed other assets.

I would normally have said that regardless of how gold tugs at your heartstrings around Diwali, you should take a hard look at the logic of gold. Unfortunately, no one knows anymore what that logic is.