Indians are obsessed with gold. And I think they should wean off gold. I know I am going to get shot because of this explosive statement ! Indians demand for gold is very significant in world markets. This demand can move and shake the markets and the prices in the world.
What attracts Indias to that lustrous metal, which is available in very small quantities in the world, and most of the mines are not in India ? Ornamentation can explain some demand for gold, not the vast majority of it. And ornamentation is a factor which is common to most of the people in the world. But the bulk of the hoarding is done due to old habits. And those habits wove themselves into social norms like the massive use in marriages. In good old times, there was no banking, no financial systems in place. Gold used to be an hedge against any financial hardship experienced by families. Its value never fell, and increased over a period of time. It was a good hedge against inflation and could be used as a collateral to borrow money in hard times.
I remember clearly when I was a college student, wanting to go on a North India tour. We saw a lot of tough times before. And my family was perenially short of money. My mother understood the importance of sending me on the tour so that I can see some tourist places, visit a few factories, and learn about our country (it was supposed to be an educational tour). She took her gold ornaments and went to a bank to pledge them to get a loan. The loan was repaid eventually. I enjoyed the tour and learnt a lot about India. And I will forever be grateful to my mother for her great deed.
Why is hoarding of huge amount of gold bad ? Firstly, most of the gold is imported. Draining India of her valuable foreign exchange. To prevent this from happening, there was a tax levied against gold transactions in this year’s budget. Secondly, there are more sophisticated ways of investing money and protecting oneself against the rainy day. Hoarded gold, while of limited use in ornamentation, is mainly a dead investment. It cannot be put to profitable use to drive the growth of the economy. It is like thousands of crores of rupees in capital lying in bedrooms all over India, which could otherwise be put to productive use. And capital is too valuable to be lying idle.
Indians’ obsession with gold is similar to America’s addiction to oil. If more Americans drive gas guzzling vasn or fuel efficient hybrids, it has an impact on the global oil markets. The oil price fluctuates depending on the demand. It also goes up and down depending on speculators. Higher oil prices support Petro dictators and terrorism worldwide.
If someone wants to speculate on the price of oil, they don’t have to buy or sell oil. That would be very messy, like taking delivery of barrels of oil. Instead, people can buy oil based futures or invest in oil based mutual funds. Similarly, speculation in gold can be done without ever seeing the shiny metal. There are mutual funds which buy and sell gold, on behalf of the investors.
I am worried about asset bubbles.If everyone wants the same thing, it creates a bubble. Mad rush results in a bubble. Herd mentality results in a bubble. The prices of any asset don’t keep increasing forever. In the end, someone is going to lose out. History is a good guide regarding this. Starting with the Tulip mania in Holland a few hundred years ago, people started buying Tulips as the prices arose. When the bubble burst, lot of people lost money. Recent example is the US Real estate prices. The real estate bubble eventually led to a depression not seen since the Great depression in 1929. It also impacted the economies of countries around the world. Gold will become an asset bubble, if Indians buy on credit. Seems to me like Indians are buying based on their prosperity, and not on credit. If credit comes into the picture, then it would be a recipe for disaster.
In the modern age, where people can participate in financial markets with the click of a mouse or by keying in a few strokes on their cell phones, the old strategy of hoarding gold is not a good one. One can invest in a combination of mutual funds or stock by setting aside some money every month. This way, the cost of buying funds averages out over a period of time. The combination of a diversified portfolio can prevent for the wild gyrations of the markets. Long term investments are likely to work out than the ones for quick short term gains.
I said what I had to say. Now I am ready for the brickbats !
Thanks Sureshji for the info. Old habits die hard. Whatever got imbued over generations, it not easy to get rid of.
Hope Prasad won't mind my butting in here. You may like to visit link (given) about why rupee could be sliding down vis-a-vis dollar.
BTW, I agree with Prasad on Indian's obsession with gold, on how they hoard it in the form of jewellery... most Indian ladies never part with it (thier lakshmi) even if they need to sell it or pledge it for economic reasons. I think it is fear psychosis. But we can't change the mind of ladies in India on this matter.
Prasad Garu, I fully agree with your analytical blog. Gold is an useless metal and investment, if only ornaments are purchased. But my wife does not understand that, no matter how hard I try to convince her saying that we have only one child that too a son - what is use of buying more and more ornaments. Hahahaha :))) The worse part is, she is equally inetrested in buying imitation jewellary or junk jewellary. :))))) Hillol
Sure Mishtiji, I respect your choices and what you value the most.
Thanks a lot. I am not as knowledgeable as you think. I will try to write as much as I can.