Our Addiction to Gold - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 14 September 2013
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Our Addiction to Gold A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
India is the largest consumer of gold in the world. On an average, each Indian spends 3% of their income on gold annually. This is more than 10 times what the average American spends on gold, as a fraction of their income. On the basis of per capita income, we are one of the poorest nations in the world, and yet our gold consumption far exceeds one of the richest nations in the world.

Much of our desire for gold is based on our culture. Many weddings would not take place unless a significant transfer of gold was involved. Historically, we have always held gold as a store of value. It is estimated that around 10% of total savings are in gold.

The consequence of our gold addiction is exactly what we are seeing today. Unfortunately, we do not produce gold domestically, and so all of our gold is imported. Our high level of gold imports means that our current account deficit is ballooning, the rupee is tumbling, and our growth is falling. We could cut our current account deficit in half is we simply stopped buying gold.

Because we love gold so much, we view all price movements as further evidence we should buy gold. When gold prices go up, it is vindication that it makes sense to buy gold. When gold prices go down, it is a great buying opportunity.

The fact that 10% of our total savings are in gold is a real problem for the country. When we invest in gold, that investment does not lead to any economic activity. It is similar to putting money under the mattress.

On the other hand, when we put our money in banks, this gets lent out to businesses for investment. Or if we invest in the stock market, we are investing in companies that produce goods and employ people. But when we invest in gold, the money is as good as gone.

Our addiction to gold is costing us dearly. Unfortunately gold is deeply entrenched in our culture, so we should not expect gold demand to fall anytime soon. Our best hope is that through education, individuals will decide over time to consume less gold. Maybe at your next family wedding, you could suggest gifts consisting of FDs and stocks instead of gold?

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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29 Responses to "Our Addiction to Gold"

VIJAYAKUMAR

Sep 20, 2013

Since olden days, especially elders had a saying that for every rupee earned 25% has to be invested in land, 25% in gold, 25% in charity, 25% for your spending. Shares and other avenues of investment only came after 80's. If only every individual had followed old saying I definitely feel every body would have been 100% happy men. Most of us have grown following lifestyles of our elders ( and those who have followed are definitely not complaining).
In my opinion, at present definitely we can't turn away from equity culture, but GOLD is, will and has to form a part of our portfolio. No body can teach INDIAN'S, not to invest in gold. As already sujjested by some readers politicians and Bureaucrats have to mend their ways.

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thejas

Sep 18, 2013

Your article looks like that of a paid and dishonest economist. Similar to the economists giving lectures to the public on the importance of reducing fiscal deficit by reducing the subsidies etc. We, the common man knows that these guys are dishonest and paid for the words they spit on us.

If the politicians stop looting this country, most of our financial problems including that of fiscal deficit will be solved. No economist will talk about that, instead they will teach us the importance of reducing subsidies.
Please don’t be one among them.

Like (1)

Chaitra

Sep 16, 2013

Gold imports play only a supportive role in CA deficit & rupee devaluation. One cannot wish away the age old economic sense, in buying gold, as a currency of 'difficult times'. Though it does not promote economic activity, it has proven give good, nearly risk free returns (which any investment should do).
Do we have the guts to let the Rupee find its real value and stop giving knee jerk reactions when it depreciates or appreciates ? Any takers for lowering fiscal deficit instead of gold and petrol ?

Like (1)

psa

Sep 16, 2013

But it has been best hedge against rupee depreciation. So common man following an asset which has generated good returns consistenetly is natural. Unless government provides alternative instrument or gets its act together to extend good sustainable returns on domestic instruments, curtailing freedom of the common man to invest in golld will be foolish. Its fashionable to curse gold investment, but show them credible alternative...

Like (1)

Suresh Kabra

Sep 16, 2013

An average Indian wears most of the gold ornaments purchased including those for marriage purposes. This tendency is difficult to curb. However, of late gold has become safe havens for ill-gotten easy money. Since most of such people are politicians and others connected with power, the Govt has not done anything to curb it. A simple law that any person purchasing gold more than Rs 40000/-, has to give his PAN details, and the same gets reflected in his AIR transactions, will discourage gold buying in big way. But, can we expect such bold step by this govt?

Like (1)

K J JOISA

Sep 16, 2013

Dear Asad,
I beg to differ from u in this matter. Why u want to deprive gold from investors?.f I invesi in equity, u don't know when u will be hit-Wockhart, Ranbaxy, Financial tech or Mcx, king fishers, Suraj diamond, Gitanjali etc. If I invest in Bank deposits, where the yeild is less than inflation, TDS also will bled u and we don't know when these banks also will go down with lendings like winsome jewellery, King fisher, Deccan Chronicle etc. To control the CAD let the Govt discourage import of luxury items, cheaper, substandard capital goods from China, which is killing indian industry and jobs, thus directly impacting the GDP. Recent article in Business Line by Mr Gurumurthy reg $500bn import of capital goods is worth pondering. I would rather prefer to spread my investment in gold, real estate,and equities.
With regards.
K J JOISA

Like (2)

Johnson

Sep 16, 2013

FDs give a return of 8.5% now a days. Remove 30% as tax and we get 5.95% returns. Offset it with retail inflation at 9.8% and we actually lose value for the money invested.

Stock market is the only place where we can "Buy" poverty. It works on sentiments and not fundamentals. Ii have failed to understand the sentiments of my wife for the last 30 yrs, how does one understand the sentiments of the stock markets? It is controlled by the FIIs, it moves up/down depending on when they withdraw/invest in it. Black money in Swiss banks are routed through FIIs in the form of "Promissory Notes" and even capital gains is avoided if routed through Mauritius.

With the uncertainties in the way US is moving forward, QE tapering whenever or whatever else, Stocks have to crash and Gold is the only option to generate real wealth. May be Gold ETFs are a via media.

Like (1)

taffazull

Sep 16, 2013

Niall Ferguson in "Ascent of Money" points out that Spaniards after looting massive amounts of silver from South America thought that they had solved their financial problems but were shocked when the price of Silver dropped steeply because of the resulting oversupply. This made them realize that Gold or Silver has no intrinsic value but only have the value that people assign to these metals.As we all know this value can even be assigned to pieces of paper with pictures of dead presidents printed on them(Krugman), plastic cards or even clicks of the mouse on the computer screen. With the delinking of Gold from the dollar by President Nixon Gold is no longer an international monetary standard. It is just a commodity like maize or cotton. As a consequence many large banks in Western Nations and Canada have completely liquidated their gold reserves.One can confidently predict that as the gold bubble artificially created by scaremongers will burst the cost of Gold will drop to a level below the cost of extraction.It will then find its true use as an ornamental metal preferably 6K or 9K gold that is even today preferred by women in USA or Europe.

Like (1)

Dileep

Sep 16, 2013

If economic activity leads to erosion in the value of savings,it is better to put money in gold, which has appreciated many time over the last 25 years, one generation, and is therefore not similar to putting money under the mattress, which does not grow at all.

Like (1)

manoharkantak

Sep 16, 2013

Necessity knows no laws. It is the loss in faith in government and its functioning that has forced people to invest in gold. I do not like to keep money blocked in gold, but can you suggest some other option, where money is safer than investing in GOLD ?

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