Gold prices have zoomed up over the last few months and obviously, savers are getting interested. Here's a warning
30-Sep-2019 •Dhirendra Kumar
Like flight attendants do at the commencement of a flight, investment advisors also need to repeat two safety announcements periodically. One is about gold and the other, obviously, about real estate. Thankfully, the last few years have made many savers realise that treating real estate as an investment means putting your money into a bottomless pit. However, gold fever makes a periodic comeback every time gold prices show a little uptick.
This time, since the beginning of 2019, gold is up about 20 percent. Given how shaky other investments have been this year, this has excited some savers. However, this is a periodic phenomena in what has otherwise been a very dull investment. The 10-year return of gold is 8.3 per cent at this point, which hardly justifies the volatility. In any case, the point of investing or not investing in gold is not just about returns, but the source of those returns.
Indian savers are still hostage to the traditional view of gold, which is that it is a simple and useful investment, a protection against bad times and all households should invest in it. The more modern market-oriented view is that gold is a commodity to be traded just like other commodities. However, my belief is that the correct view is something else entirely: savers can legitimately treat gold as an investment, as it has some unique features; but it's not a very good investment and there are always better things to do with your savings. As an investment, like any other, it must be judged according to returns, with liquidity, stability and other such additional factors. Taking all these into consideration, gold does not make sense.
The returns tend to be worse than other investments of similar risk and volatility, and this will always be the case. The reason is that gold does not actually produce anything or create any value. Any rise in its worth is based on the belief that when the time comes to sell, someone else will pay more for it. Unlike equity or bonds or bank deposits, the money that you invest in gold does not contribute to economic growth. The same amount of money put into a good business or any other productive economic activity will create wealth. However, a given quantity of gold will remain the same forever.
Readers may notice that I'm not saying that no one should ever invest in gold. I mean I'm almost saying it, but not quite. However, those who are actually reading this column obviously have access to a modern financial system and they have no reason to dabble in gold. Gold makes sense only for those who have no access to or no trust in the financial system, or who expect to be in such a situation. Basically, it's an alternate currency.
Even if you do decide that you want gold, 'paper gold' makes far more sense than physical gold. Gold-backed mutual funds closely track the value of gold. These are open-ended funds and can be redeemed at any point. However, if you don't mind a loss of liquidity and can lock the money for five years, Government of India's gold bonds are issued periodically and are sold by banks. Their value increases in step with gold, plus there's an extra interest of 2.5 per cent per year. The interest is taxable income but the capital gains are tax-free, unlike any other investment available nowadays.
A lot of people find it difficult to accept that gold is not a good investment because we instinctively think of gold as permanent wealth, a currency that has survived all kinds of historical troubles. This is unarguably true. Is that enough for gold to be considered an investment by savers in a modern financial system? The answer would have to be no.