Is fondness for gold hindering India's growth?

Sep 5, 2011

In this issue:
» At what level does debt become dangerous?
» Jim Rogers lessons for investing in today's world
» India's inflation amongst most severe in Asia
» Despite glum in real estate, house prices remain firm
» ...and more!

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Our headline for the day may have baffled you a bit; for how in the world can our fondness for gold be affecting our economic growth. Your confusion is very much valid since we seldom hear about gold consumption having any implication on economic growth.

There has been so much hoopla about gold and other precious metals ever since the global financial crisis erupted. Ever since, the attractiveness of the yellow metal has grown in reciprocation to the chaos and crisis in the global economy. With economies slowing down, debt crises raging in the developed world and their central banks on a money printing binge, gold prices have happily climbed to record levels. But this doesn't seem to have deterred Indian investors. At a time when stock markets are seeming uncertain and paper money losing its worth, investors are steadily flocking into gold. As per World Gold Council, India's gold imports rose 60% year-on-year (YoY) during the quarter ended June 2011.

As per a leading daily, gold is now our second biggest import, behind only crude oil. The daily further adds that when one buys gold, it either sits quietly in our lockers or becomes jewellery. In both the cases, money gets locked since gold is not a productive asset. India's household savings have shifted away from productive financial assets, declining from 12.1% of Gross Domestic Product (GDP) in 2009-10 to 9.7% in 2010-11. Gold imports have gone up nearly 50 basis points (half a percentage point) of the GDP in the last three years. This means that more and more resources are getting locked up in an asset that does not help produce anything. Effectively, it hinders economic growth to a certain extent. The other problem is that India heavily depends on gold imports as we don't produce much of it in our own economy. As a result, it adds to our current account deficit.

Is the above mentioned view correct? We don't quite think so. According to us, there can be no objective definition of what is productive and what is not. And gold may not be able to produce anything but it sure can be exchanged for any good or service in this universe. Furthermore, the rate at which currencies are being printed, there is a strong possibility that gold will maintain its real value and buy more goods and services down the line than paper money. As far as resources getting locked up are concerned, it should also be noted that by way of gold loans, a trend that is catching up fast, a lot of resources are also being used up.

Do you think the argument that excess investment in gold hinders India's economic growth correct? Share comments with us or post your views on our Facebook page.

 Chart of the day
Debt is dangerous! Does anyone have second thoughts about that? Probably not! Especially after the crisis that even the richest nations in the world have been subjected to on account of over leveraging. But can anyone put a finger on what exactly is the tipping point of a debt crisis? We came across an article in The Telegraph that attempted to do just that. 80 to 100% of GDP for governments, 90% of GDP for companies and 85% of GDP for households can be the debt warning signal claims the article. For companies and households, the GDP can be construed as the annual income levels.

That the rich nations' debt levels have touched obscene numbers can be judged easily based on these benchmarks. The combined debt of the developed nations rose from 165% of GDP 30 years ago to 310% in 2010. This is 3 times the acceptable level! As today's chart of the day shows, Japan and Portugal have combined household, corporate and government debt levels of 456% and 363% of GDP respectively. In fact, the economies did not see such high levels of debt even during the wars. Add to that the facts that demographic atrophy and aging costs will make the scenario even nastier. However, it is not enough to know that such high debt levels are dangerous. The wrong notion that debtors can keep borrowing as long as creditors are willing to lend needs to be shed immediately. If not, we may end up with too many cases like the US and China where neither has benefitted from the economic excesses.

Data source: The Telegraph

It always feels great to hear Jim Rogers speak. In our books, he has one of the best insights on the big, complex world of finance. After all, not all investors are able to multiply their money by a mindboggling 43 times in a short span of 10 years. To be able to do so, one really needs to be a special talent. And Rogers does qualify this test with flying colours we believe. So what's on Jim Rogers' mind these days? A finance portal called The Daily Crux set out to find just this in a lengthy interview with the commodities guru. Rogers is of the opinion that the US seems to have entered what he calls a state of decline and he sees very few signs that can turn things around permanently. Therefore, he is urging everyone to learn about investing outside of the US. As far as other investment opportunities are concerned, he has opined that the current time is like the 1970s. And hence, one is more likely to make money in real assets rather than stocks.

He also had a view or two on career planning. As per him, finance is going to be a terrible place to pursue career-wise in the developed world. Instead, one could do well if one is a producer of real goods. This has happened repeatedly throughout history, believes Rogers. We have had long periods where financial types were the kingpins followed by periods where real goods were the kingpins. It is once again reversing now in favour of the latter. Some very good food for thought here we think.

Inflation in India has been high for quite some time now with the main culprit being rising food prices. And despite Reserve Bank of India's (RBI) attempts to tone it down through rate hikes, it has still not come within the comfort levels of the central bank. What is more, Mr Richard Iley, Chief Economist, Asia, BNP Paribas opines that inflation in India is different from that of its Asian peers and has been the most acute for several years now. This is because of increasingly structural food price issues and rising demand for proteins and foodgrains as a result of higher disposable incomes. And food being a significant part of the wholesale price index (WPI), rise in food prices has fueled overall inflation as well. Further, according to Mr Iley, food prices in India do not have a strong correlation with global food prices the way China does. Prices here are determined more by domestic factors. As far as rate hikes are concerned, Mr Iley believes that the RBI has reached the peak of the cycle. But even if it chooses not to raise rates further, it will be reluctant to loosen monetary policies too. This means that in a high interest rate environment, India's GDP growth could witness some slowdown in the medium term at least.

Real estate players seem to have iron nerves. Despite weak macro-economic environment and gloom in the real estate sector, housing prices continue to remain firm across India. According to a survey by the National Housing Bank, house prices have displayed a rising trend in 12 Indian cities in the April-June quarter of 2011. While metro cities of Delhi, Chennai and Hyderabad have witnessed double-digit price appreciation, Mumbai and Bangalore have shown an increase of low single-digit. However, is this demand-driven price appreciation? It does not appear so as buyers' sentiments remain weak. RBI has raised interest rates 11 times since March 2010 to tame inflation. The sharp increase in borrowing costs and high property prices have kept buyers on the sidelines. The double whammy of plunging sales and rising construction costs is taking its toll on the profitability of real estate majors who already are weighing under heavy debt and interest costs. Whether real estate companies reduce property prices ahead of the festive season is something that remains to be seen. But one thing is for sure, the current rise in housing prices is not sustainable, particularly because the demand-supply economics is not favorable to developers at the current levels.

In the meanwhile, Indian stock markets have been trading in the negative territory today. At the time of writing, the benchmark BSE Sensex was down by 140 points (0.8%). IT and oil & gas stocks were the top losers while consumer durables and auto stocks were trading firm. Barring Indonesia, red marks were seen across Asian stock markets. Europe, too, opened the trade in the red.

 Today's investing mantra
"I will be talking about pricing stocks, but I will not be talking about predicting their course of action next month or next year. Valuing is not the same as predicting." - Warren Buffett

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22 Responses to "Is fondness for gold hindering India's growth?"

Daniel Menezes

Dec 11, 2011

Every analysis has got its own beauty proving to be correct and wrong. If not it can’t be an analysis and no one will buy the same. Whereas, investment in gold there isn’t any productivity and of course, Yes! Investing in secondary stock market what productivity is there but a complete gambling and losing on every stage and come out empty handed?
Productivity in primary stock market, for example such a renowned, prestigious company like Reliance, in reliance power the share were issued at the rate of Rs. 400, 3 years ago and now in the secondary market being sold at Rs. 84
All is well, and nothing is right!


nishikant pednekar

Sep 9, 2011

your views have cleared my confusion about gold saving. Still we need to educate Indian people for their better saving habits financial planning.

your article have served this purpose to some extent.


Pankaj Gupta

Sep 7, 2011

I have respected Equitymaster for its objective analysis and to provide an informed opinion; not to raise the debate initiated by the brain dead writer complaining that gold holding hinders GDP growth (i.e. someone who toes the line of government and central bankers who merrily issue IOUs at drop of the hat and then call that a 'currency' or 'legal tender' to facilitate economic growth!!)

After just 40 years, gold is regaining its role as a currency which is actually an asset, whose supply is determined by mother nature and which is beyond the control of legally authorised counterfeiters like Bernanke or our own RBI / Ministry of Finance combine.

The purpose of a dependable currency is to be a store the economic power a role taken by gold for thousands of years, not theft by stealth - which is what governments in India (and world at large) have done by legally counterfeiting of currencies

Sorry to say that Equitymaster in this instance, has actually failed in the current instance of stonglyly refuting these government sponsored plants and not being a meek opponent



Sep 6, 2011

I think you already provided answer in the second part.
Gold once saved India from defaulting (Chandra sekhar govt)
As K Patel viewed, house hold gold purchases are not equal to one Scam.
As Vinay told, without gold most families don't feel secure.
Definitely I never expected this loose article from you. Can you please some light on who is buying how much? (Rich Vs middle class families). You yourself will get right answer.
Don’t call multi millionaire families as Indian ‘Families’. They are investors (Greedy-as per your first part)
I think the writer would have not have had touch with middle class families of India.


uday pasricha

Sep 6, 2011

Economists need to hammer home the point as to the LOSS to GDP when gold is purchased in physical form. Growth in incomes and GDP is not just based on quantum of money invested or saved BUT almost purely on the "rotations of each rupee within the economy before it ends up as a fixed asset". That is why services has such a string effect because in service industry almost 80% of turnover becomes in turn anothers income and this happens a few times. Gold is bought and kills money rotation. Articles that keep selling to individuals the idea that Gold is great investment must be countered by warnings that Gold is now just a temporary derivative cover for speculators and should be cashed out regularly and investments made in productive assets.



Sep 6, 2011

Is fondness for gold hindering India's growth?
Dear Sir,
This is the best choice to thrive in the long run for our country, is, save only gold and import nothing other than the gold 100%, by it we will be the richest.As we are being rich we are entitle to eat Gold, lets enjoy eating Gold, because when we go for any edible import, again they raise their commodities as they wish and as we are being rich we very well afford to pay any amount of Barter. So lets Enjoy THE VALUABLE GOLD.
Thank you for the good posting.



Sep 5, 2011

Without doubt buying gold is a disaster for the economy . Imagine if it were mud instead of gold , we would be siting on large quantities of it and women could not even flaunt it ! Not so long ago it was pearls, diamonds, even women who were stocked in harems. But then where will the Gold and precious metal analysts go ?In India we have the absurd situation that gold import is taxed far lower than raw materials and capital goods ! This argument applies to all commodities in varying degrees so oil futures are as productive and today do not even serve the primary purpose of signaling demand supply mismatch . Is gold and all gold "fools" gold ? Only time will tell .



Sep 5, 2011

Reg gold being an unproductive asset, I feel the same. Indians accumulating gold is nothing new, but now, thanks to the uncertainty it has reached new levels. Also selling gold is seen as a last resort, when all other doors are shut. As for gold loans, how many people avail them? So, any purchase of gold means either for locker custody or jewellery purpose, both of which don,thelp the economy to grow. regds


Dr v g mishra

Sep 5, 2011

Indians specially FEMALES HAVE inherent property
to love gold, this traditionally comes from very
early days.Gold as a currency used in time of
crisis either personal or for country like Indo
CHINA war in 1962.nothing harm in this thought.
Evil comes with gold trading.But after all it will
become beneficial in long run for development of
our country.



Sep 5, 2011

Hahaha.. DEBT takes an economy down and savings also take the economy down. its better to save then to have debt.. :) ) :)

And India's economy wont slow down just because people started having more money in GOLD. This is just to make an induced rally/fall in GOLD.

I keep hearing that GOLD has no industrial use at all. But why the hell BIGGIES always go to gold. :) :) :) There is some reason for that. GOLD was the currency standard earlier before DOLLAR and since there are no other currencies which can take what DOLLAR withstands, hence GOLD becomes a preferred choice.

GOLD is preferred because of its scarcity as well just like platinum or pallidium. Any thing in less supply will always find buyers and you gotta pay more.

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