Gold: Good to the last ounce
A characteristic of India has been that the household sector accounts for almost three-fourths of gross savings. Yet, for many years, the return on financial savings has been inadequate. Gross savings have been falling in recent years from a peak of 35 per cent of GDP during the period 2005-08 to 30.1 per cent in 2012-13. Household sector financial savings have fallen from 11.6 per cent to 7.1 per cent during the same period, while savings in physical assets rose from 11.4 per cent to 14.8 per cent. Although the return on financial savings, in real terms (i.e. adjusted for inflation) has been pathetically low, loud noises are made by powerful lobbies that policy interest rates should be lowered. The Reserve Bank of India (RBI) has, till now, resisted these pressures; savers can only pray that Governor Raghuram Rajan does not reduce policy interest rates on December 2, 2014.
Gold, a prudent investment
Much as intellectuals in India unleash a diatribe against investment in gold, the common person, over the years, has come up trumps by investing in gold. A strange moral argument is used to dissuade the common person from investing in gold. While it is considered appropriate to let the rich splurge on luxury goods, which are invariably imported, it is argued that the authorities are duty-bound to save the common person from ruin by investing in gold. There is glaring hypocrisy. Politicians, civil servants, policymakers, opinion makers and economists all buy gold, yet, when it comes to advocating policies, they strongly argue for controls on gold imports.
Futility of curbs on gold
The history of the past 75 years in India has been that the tighter the gold import regime, the higher the illicit imports of gold. Reports by the World Gold Council indicate that while official imports of gold have fallen during the past year, illicit imports have risen sharply and the annual demand for gold in India of 850-900 tonnes has been met.
All that the gold curbs do is to distort the balance of payments data. The curbs result in under-invoicing of exports, over-invoicing of imports and a reduction in migrant transfers. It needs to be appreciated that illicit imports of gold into India do not come free; they have to be paid for. Erudite scholars who laud the curbs on gold imports as being beneficial to India need to rethink their position.
International gold prices
In the recent period, international gold prices did fall to US $ 1,150 per ounce-lowest since the end of 2009. At the present time, international gold prices are about 40 per cent below the peak of US $ 1,900 per ounce reached in September 2011. Those against gold warn that buying gold is like attempting to catch a falling knife and there are forecasts that the gold price could fall to US $ 800 per ounce in 2015. This is unlikely as presently, gold prices are close to the cost of production and any fall in the gold price would result in reduced production and increase in demand. Thus, wild talk of further fall in gold prices is unsubstantiated. Furthermore, current gold prices appear to have already discounted any possibility of US policy interest rates rising over the next year.
Options for the common person
If Indian policy interest rates fall, household savers would be well-advised to move out of financial assets and into gold. It is not as if there should be a total shift. A prudent approach is to have gold holdings, up to say, 10 per cent of an individual's total assets. It would be best for individuals to gradually build up a portfolio of gold. Paper gold in terms of an Exchange Traded Gold Fund would be the ideal, but for those who do not have a Demat account, they could invest in a Gold Fund of Funds Mutual Fund. As for those whose preference is for physical gold, it would be best to hold primary gold and not jewellery, as melting and remaking charges are very high.
It is pertinent to note that China imports about 1,550 tonnes of gold per annum and furthermore, there is domestic production of around 450 tonnes; thus total annual consumption of gold in China is around 2,000 tonnes. The Chinese authorities have recognised the futility of curbing the demand for gold and this has fostered a transparent gold market in China, which is well-integrated into the international gold market.
Frenzy against gold in India
Some influential quarters in India are calling for an emotional appeal by the Prime Minister to say that buying gold is an anti-national policy. This goes against the grain of the basic philosophy of the present government not to use supreme coercive power of the State to determine consumer choices. The Prime Minister would do well to avoid the pitfalls of such appeals. Gold is a commodity, as also a medium of exchange and a store of value and in a sense it is Nature's own currency. If the authorities wish to reduce the demand for gold, they need to adopt appropriate financial policies and refrain from resorting to state control over consumer choices. In a milieu of policy inconsistencies for savers, gold is the last refuge.
Please Note: This article was first published in The Freepress Journal on December 01, 2014. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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