Article (published in a national daily, April 2013)

Because even gold does not glitter forever!

“Sone ki Lanka” was the term used in Ramayana to describe the wealth of Ravana’s empire. Then came the phrase “Sone ki Chidiya” to describe the opulence of pre-British India. History and folktales, both describe how the richest of temples and kings were filled in the yellow metal and how “Paras Stone” had the ability to turn everything to gold. Gold was a measure of prosperity of a kingdom, might of an individual and devotion in religion.

The over reliance on gold as a tool of saving is a unique to India because of a variety of reasons. First, gold was easy to store and hide, and in a country which was overrun by numerous invaders it was the safest way to protect wealth. Second, because gold gained universal acceptance across India due to the endorsement of the religious institutions, its value remained high no matter where it was used. Third, because gold is chemically inert, does not contaminate, burn or lose shine it was a secured against the forces of nature.

Today, India accounts for about one-third of the worldwide gold demand and it forms the second biggest import item in the national economy, more than iron, steel and coal. As shown in the table, India consumers five more gold than USA, while being less than one-tenth of the size in terms of economy. Even compared to China, India consumers nearly 37% more of gold, and surprisingly, India is not amongst the top five gold producers.

Consumer’s Gold Demand vis-à-vis GDP
	Jewellery (in tonnes)	Total bar and coin invest (in tonnes)	Total	Economy Size (GDP) in thousand crore rupees
India	650	409	1059	8800
China	509	261	770	32450
Russia	70		70	8250
USA	119	94	213	81400
UK	25		25	12100
World	2018	1409	3427

In strict economic sense, this hunger for investing in Gold is a not a health trend for the nation. Gold is a static asset, a metal which does not grow, does not generate jobs, does not make an industrial input and does not create an income. And although it does provide cushions against economic shocks, it also serves as an excellent way to park black money. Moreover, in the recent past, it is clear that even gold prices can fluctuate sharply and are dependent on international markets.

 As nations advance, their technologies grow which leads to the opportunity to create more and more enterprises, which will deliver growth and profits to the economy. This is ideally where investments and savings should be directed for a better future instead of using gold which only adds to imports.

India needs a three pronged strategy to correct the gold rush it has witnessed over decades now. First, we need to expand the financial institutions like banks to reach out to rural and last mile people who can find it as a better proposition to save their money. Second, gold-backed financing needs to be aggressively encouraged to ensure that the gold in the safes of homes comes out and generate meaningful investment opportunities.  Third, import of gold for domestic consumption needs regulation. India is an economy which is already reeling under pressure from its oil import bills, and the added import of gold is only adding to the fiscal deficits.

As investors one must realize that the value of gold is derived from a variety of factors and it is as volatile as any other investment. Due to pressure on international oil market post Iraq war and Iran crisis and worldwide financial turbulence, in the past 3-4 years, gold gained value as an alternative investment. But whenever industry pick up momentum, the price of gold is bound to correct itself.

So will the current price of gold go up again? Yes, probably given the turbulence in Korea is escalating it may do so within the month. But, it is bound to see fluctuations again too when things ease out. Gold will always see the cycles of price because even gold does not glitter forever.   

By

Srijan Pal Singh