Gold may be a favourite for those who avoid financial investments, but for anyone else, it makes little sense
17-Jan-2018 •Dhirendra Kumar
A recent newspaper report says that higher crop prices have led to higher gold sales in rural areas. Quoting people from the retail jewellery industry, it says that gold sales in December were higher than the previous month by 15 per cent. Of course, this can hardly be considered data because it does not compare to the matching periods of previous years. Even so, it may well be true. In any case, the fact still remains that gold is a major form of saving in rural areas and small towns in India. Increased prosperity and some spare cash translates into buying more gold. Apart from a narrow set of people who have 'financialised' their savings, there remains a deep faith in gold that seems unshakeable as it is ingrained in them for decades or even centuries.
I don't doubt that even among those using this website, there is no paucity of people who have a deep belief in it as an investment. Most Indians consider gold to be a good passive investment and an excellent and reliable store of value. Of course, it goes without saying that gold is an investment--anything that can be bought and sold is an investment. Sometime ago, ace investor, Warren Buffett explained the gold problem very eloquently in an article titled 'Why stocks beat gold and bonds.
Here's the money quote from that article: Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. At $1,750 per ounce - gold's price as I write this - its value would be about $9.6 trillion. Call this cube pile A. Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over... Can you imagine an investor with $9.6 trillion selecting pile A over pile B? A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond'.
As Buffett points out, in gold's case, there's the additional problem of supply. At the (then) current prices, the world produces 168 billion US dollars of gold every year. Not just that, it is in the interest of the producers to dig up as much of the stuff as possible. It takes a lot of fresh inflows to sustain gold prices.
Whether at an individual level or at the level of the entire economy, gold is a dead investment that does not generate any remarkable returns. In fact, for India, as has often been pointed out, our huge appetite for gold is particularly harmful. The shiny metal is also responsible for perpetuating the twin evil of imports as well as being used as a secondary currency for evading taxes. My sense is that among a certain class of urban Indians, gold has lost a lot of its sheen. Will rural India ever feel the same way? We do not have a definite answer to that yet.
However, at a personal level, I think, unless one is not educated or knowledgeable enough to figure it all out, or one is evading taxes, there is no point in investing in gold. Almost any financial investment is better. Long-term equity investments are even tax-free!