November 02, 2011

Is obsession of Investment in Gold, Good?

Betal- Why Indians are obsessed with gold?

King Vikram-Since the dawn of civilization, India has been a country obsessed with gold.
Our appetite for gold was simply insatiable because we were so smitten by its malleability; scarcity and glitter. Many believe that this hoarding and sitting on money sowed the seeds of the humongous economic inequality in India. The rich never gave a chance to the others.

Anyway, here we will be attacking two common misconceptions most Indians have about gold as an investment.

1. Buying Jewelry is an Investment
Jewelry is a sensitive topic and often a bone of domestic contention. We don't want to upset people who like to buy gold jewelry and neither do we want to discourage it. We just want people to realize that buying gold jewelry is first and foremost an act of consumption, expenditure and then an investment.

Investment is something which is expected to grow in value and is later sold for consumption. Granted, it acts as safety net and in emergencies, people do sell it. But usually, we don't really sell gold. Like entropy, our gold possession only increases year by year. You could argue that by same logic real estate also is a sticky investment, and we usually don't sell it. But then real estate produces real income while gold only incurs storage costs.

Apart from that, when you really need to sell gold jewelry, you won't be getting more than 70%-75% of its value in cash. 15%-20% of the value is gone because of wastage and initial making charges. Further, you would probably have to accept less money if you want cash, instead of store credit.

2. Gold Always Goes Up
Most Indians think that gold prices never really go down. It's not really their fault because that's how gold prices have looked like in last few decades.

Except minor ups and downs, gold has mostly gone up in our or our parents' lifetime. However, gold has only gone up in rupee terms.

We have been shielded or have been blind to the fluctuations in the world gold market because of the dollar-rupee exchange rate. We saw everything through the rupee goggles! But unlike barley or jaggery, gold is mostly produced outside India and imported by paying dollars.

The dollar-rupee exchange rate plays a huge part in determining the price of gold in India. Now let's have a look at what was happening to the exchange rate between 1980-2000. You'll soon realize why we are choosing this period. In 1980, the dollar was worth only 8 rupees. However, in next 20 years, dollar went up to Rs. 44 per USD. This was a phenomenal change and the dollar was more than 5 times expensive in 20 years! Could this have distorted our view of gold price? Let's have a look.

Gold almost lost 60% of its value in this period! Plenty of senior citizens would be shocked to know this. They were unaware all the time!

Betal- So Should I Invest in Gold or Not?
King Vikram-Compare this to today's situation. Despite high stock prices, worries and anxiety over the health of world economy are at an all time high. This is clearly being reflected in high gold prices. But if the markets keep on doing very well, gold is bound to go down. On top of it, if this happens, rupee would also appreciate against dollar. So unlike 1980-2000, this will act in the opposite direction and hit the Indian gold owner from both sides, a double whammy!

So if you want to invest in gold, either buy gold coins from banks or buy gold ETFs. But if you have received a bonus and want to pamper yourself or your spouse, do buy gold jewelry. Just understand that it's not really an investment; at least not all of it.

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