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There are 3 things of lasting value in India: the HDFC brand name, the Infosys brand name, and gold.
My experience shows that when anyone from HDFC or Infosys makes a statement or a commitment, the word is their bond.
But what do you weigh gold against?
Gold, historically, was a currency. A medium of exchange. If you wanted to buy a piece of land, it was priced in gold. If you wanted to buy food, it was priced in gold. But gold is a bulky item and one could not always check its purity while a transaction was taking place. So, somewhere down the line, to facilitate commerce, gold was substituted for paper currencies.
Paper currencies were paper notes issued by the central bankers of the world in lieu of a certain amount of gold they held in their vaults. This worked reasonably well for a long time until governments - and the politicians that run them - started winking at each other and, in the process, began hood winking the general public. A government in power wished to get re-elected, so it began making promises. And going on wild expeditions like a teenager pumped up with hormones. The grander the stupidity of the idea, the more determined the teenager.
All very noble causes, beyond any doubt.
But every cause - no matter how noble - needs to be financed.
In truth, there is only one way to pay for what you want to spend on: to have the money to pay for it.
So, urged on by politicians who wished to spend - but knew they could not ask for higher taxes - central banks began changing the ratio of paper currency to gold they had in their vaults.
The central banks did this in two ways: they printed more money, so there was less gold per unit of paper in circulation out there.
Or they sold the gold they had, which also resulted in more paper in circulation per unit of gold they had.
The smarter central banks did both: they printed more paper and they sold gold.
Consider the USA.
But the fact that the US sold their gold is only half the story.
In 1956, the US economy was about USD 2,200 billion in size - about 2x as large as where India's economy is today.
Today, the US economy is about USD 11,000 billion in size - so it has grown by 5x over the past 52 years.
I won't bore you with why this suggests that there is an economic disaster waiting to happen, but imagine you are running your household.
Embarrassed by its printing of excessive paper and diluting the inherent value of its own currency, the US government decided not to publish the value of the amount of US Dollar currency sloshing around the world.
Not only will the bar tender ultimately go bust, but so will his patrons.
What is true of the US central bank is true of most central banks - and governments. Their responsibility is to print and produce paper to finance dreams.
I ask my father and my uncles about their childhood and I get another lesson in economic history.
What did an apartment in South Bombay cost? Rs. 55,000 for a 3,000 square feet apartment in Breach Candy, that works out to Rs. 18.33 per square foot. Today, the apartment would cost Rs. 40,000 per square foot. That is an increase of 2,182 times.
In 60 years, we have lost so much value in our currency.
And I step back in history. What was the one currency that has withstood the test of time? Of wars, of famines, of happy times, of disasters. The one currency that cannot be debased by governments, much as they try.
When the modern world emerged from World War II and there was the grand dream of rebuilding Europe and Japan, the central bankers of the world got together and froze the price of gold at US$ 35 per ounce in 1946.
For much of the 25 year period between 1946 and 1971, recognizing that the US spending on the war with Vietnam and the war with its own poverty was forcing the US central bank to print more money than it should (since no politician wanted to raise taxes to finance these dreams) the major central banks in the world struggled to keep the price of gold steady between US$ 38 and US$ 42 per ounce. Finally, in 1971, the central bankers effectively surrendered and admitted they could no longer conceal the fact that paper currencies were worth less than gold.
The famous Hunt brothers from Texas tried to artificially "corner" the silver market in 1979. Gold responded to that catalyst. If silver can increase in value on the basis of being a currency, gold - the true currency - could also surge in value. Gold breached USD 850 per ounce. But when the silver bubble burst, gold declined sharply. Sensing victory, the central banks ensured that gold remained a forgotten asset class. By the end of 1999, gold was beaten down to USD 263 an ounce.
Central bankers were selling gold. In August 1997, the Australian central bank announced they would sell 167 tonnes of gold - that was 67% of their gold reserves. Here was a gold producing country dumping gold. The price of gold fell 3% on this news. Not wanting to disrupt the price of gold as they encashed their profits, the major nations had a Central Bank Gold Selling Agreement in place that mapped out how they would sell gold and limited the gold sales to 500 tonnes per year.
And like history has shown, time and again, blind trust will only make you poor.
What did the central bankers do with our trust? They sold it to the financial engineers and the large financial firms - for the profits of those financial emperors.
Every time the private banks lent money and surrendered risk they were rewarded by fat salaries and bonuses. Every time the private banks head for bankruptcy they come back to the central banks and say, "TBTF - too big to fail." And every time the central bank - and the governments which control them - blink at the financial geniuses and bail them out. They have done it again. By printing more money. Lots of it. They have lost count of how much they have printed. They have stopped counting.
Sure, gold has had a great run. From USD 300 per ounce in the year 2000 to USD 900 today. An increase of 300% in 7 years. Not bad.
But where was gold in 1944, when my uncles were buying samosa?
Whichever way you slice it, dice it, or cut it - other things have gotten more expensive and gold has gotten relatively cheaper!
The price of gold has to increase by 12x from today to keep pace with the increase in prices of a samosa.
I thought a lot about it.
I love the prospects of what returns I can get in the Indian stock market. So we set up the Quantum Long Term Equity Fund and I invested in that Fund, just as I hope you did. And I think we will do well. I like the managements that the Fund invests in and I believe these businesses can deliver good returns in the long run.
I have been buying gold for some seven years now. I made my first purchases when the central banks were selling. But we have decided to launch the Quantum Gold ETF - the least costly and easiest way to buy gold. And I am subscribing to it. In full disclosure, I already own some gold - but now wish to buy a lot more of it. Why? Because the central bankers have proven to me, once again, that they have little respect for maintaining the value of the paper currencies they print. Luckily, they have no control about how much gold they can create. And if they want to restore value to the paper they print, they will need to go back and buy that gold they sold in 1999.