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Why not to buy Gold

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July 11, 2013 by thejalebichronicles

Malice in Wonderland: Scorn for mainstream information that will shatter the image of Wonderland that we all have of the world.

studded-gold-jewellery-collection

Gold. The four letter word that makes Indians go wild. No matter what socio-economic class an Indian family comes from, they will always have a handsome pile of gold hidden away in a corner of their house. India is the biggest importer of Gold in the world; beating even China. 33 per cent of the world’s gold is consumed by India. Out of this, more than half of gold is used for jewellery designing and 25 per cent is used by private owners and the Central Bank as gold reserves. In India, an average middle class household buys about 15-80 lacs worth of gold jewellery in a single lifetime.

Every little change in the gold price makes headlines. The occasion of Akshya Tritiya, (believed to be an auspicious one to buy gold,)  frequently results in  the precious metal’s price reaching an all year high, (2013 saw gold touching around 23,000 INR per 10 gms,). Gold is something that one has, and continues to associate with Indians.

chidambaram-10410630Despite having such fixed and high demand, gold has not been doing very well lately. The price of gold fell from 6.3% to $1,288 an ounce on the 20th of June, its lowest in two and a half years and below the psychologically significant $1,300. It’s more than 33% below its all-time peak of $1,895 an ounce, which was reached in September 2011. This doesn’t really come as a shock, coming after P. Chidambaram’s, speech insisting Indians not buy gold. The question is, why so much hullabaloo about the gold price of late?

Indian financial pundits have always insisted that Indians keep stocking up on gold no matter its price. The belief is that Indians tend to store up on gold for marriages. Gold is also a matter of prestige and selling of gold assets generally gives the impression that a family is not doing that well financially. However, all these are secondary investments. The cautious Indian investor thinks that the metal is a ‘safe bet’ and that the price generally increases over time. Why invest in bonds, shares or mutual funds when they are subject to market risks? Gold is something that is always ready and permanent, and the investment rate will always be greater than the inflation rate. The cautious Indian mind calculates all these risks and assume that they acquire prestige, security and a good investment all rolled into one bar of the shiny yellow metal

So if gold is really that good of a thing for investors, why do we hear our FM insisting that we do not stock up on it? Firstly, out of the one-third of the entire gold produced in the world and consumed in India, none of it is acquired indigenously. India is importing gold from producers like China, the United States, Russia, South Africa and Australia. Gold is the most one of the most imported commodities next to crude oil. This means that the government pays in USD for the commodity, which we pay for in rupees. This affects the value of the rupee negatively. This also implies that the government ends up paying around 60 billion USD for gold every year.

Gold-Bars-in-Fort-KnoxAdding to this is the fact that gold is an unproductive investment. It is a commodity which when bought, lies around in a locker in a bank, only to be taken out to adorn a woman on occasions. Unlike fixed deposits, bonds, shares and investment policies which are all good sources of productivity for corporate and government bodies, gold is latent and does not positively impact the economy. This worries the government, forcing   them to raise import duties for the commodity. It may seem like a good idea, but this merely results in an increase of smuggling and black market dealings.

So what is an investor to do? Obviously, investing in gold is not a good idea from an economic point of view. Perhaps investors can put their money in gold ETFs instead of physically buying ingots. Gold ETFs or Exchange Trade Funds are easier to hold and there is no worry of keeping it safe. Also, as you buy a stock of it, you’re assisting the economy by continuing the trade cycle instead of leaving a whole chunk of an investment just lying around.

So here it is-another gold obsessed Indian’s view on the metal that makes us go crazy, and why we should NOT stock up on it.

–          Diksha Negi

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2 thoughts on “Why not to buy Gold

  1. Manish Raj says:

    Dikshu.. I am proud of you. If girls of your age are able to think so clearly, things will eventually get better. Very well written. God bless.

  2. Anonymous says:

    Bad investment advice, check the price of gold.

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