A recent newspaper report says higher crop prices have led to higher gold sales in rural India. Quoting people from the retail jewellery industry, it says gold sales in December 2017 were 15% higher than in the previous month. Of course, this can hardly be considered data because it does not provide comparisons with figures from matching periods in previous years. Even so, it may well be true. In any case the fact remains that gold is a major form of saving in rural and small town India. Increased prosperity, or even some spare cash, always leads to more gold being bought. Apart from a narrow set of people who have ‘financialised’ their savings, there remains a deep faith in gold that seems unshakeable at any scale less than that of decades, or even centuries.
I don’t doubt that even among those reading this newspaper, there would be no paucity of people who have a deep belief in gold as an investment. Most Indians consider gold to be a good passive investment and an excellent and reliable store of value. It goes without saying that gold is an investment – anything that can be bought and then sold is an investment. Some years ago, the great investor Warren Buffett explained the gold problem very nicely 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 1,70,000 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 US 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.
At an individual or at the level of entire economies, gold is a dead investment that does not produce anything. In fact, for India, as has often been pointed out, our huge appetite for gold is especially harmful. There are massive gold imports, as well as the use of gold effectively as a second currency for cheating on taxes. Among a certain class of urban Indians, gold has lost a lot of its sheen. Whether it will ever do so in rural India is an unanswerable question. At a personal level, unless one is not educated or knowledgeable enough to figure it out, or one is cheating on taxes, there is no point in investing in gold. Any financial investment is better. Long term equity investments (link this to the Stock market page) are even tax-free.
Article Source – Economic Times
