• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

J. Karthikeyan

Advertisement

India is in love with gold. Indians have always been big buyers of gold jewellery. The buying spree has increased in the recent past with jewellers and banks working overtime to popularise festivals and social events such as Akshaya Trithiya, Dhashera, Karva Chauth, Raksha Bandhan and Dhanteras as auspicious days to purchase gold. The amount of gold in Indian households is close to 15,000 tonnes which is valued at a whopping Rs 17,06,190 crore as of March 31, 2008.

About 252 people were asked this question after they came out of jewellery shops in different Indian cities. The results are given in Table 1.

The 5 per cent who said they were considering it as an investment appear slightly more evolved than the others.

Does that mean that all the other purposes for buying gold are wrong? No.

Is gold an investment? Let’s settle this first before progressing further. Gold has a lot of emotional value. But as an investment, it does not have much value. Let me make use of historical data to prove this to you.

We know that inflation means prices increase for all day-to-day goods. The rate of inflation can be tracked using the Cost Inflation Index declared by the income-tax department every year. This tool is used by the department to allow tax indexation benefits on long-term capital gains. Hence, this index is ideal for benchmarking investments. Table 2 compares the price of gold with the inflation index.

Now you tell me whether gold is a great investment. Would you call something that returns just 0.80 per cent over inflation an investment at all?

And we have not even considered the 15-25 per cent making and wastage charges that our friendly jewellers will charge on the purchase.

Is it wrong to put money in gold? Not really. Gold has its uses, if kept as pure coins and bars:

It has high liquidity. It might take you a maximum of half hour to convert it to cash.

It is easy to procure (again half an hour) and protect (a bank locker will do) compared to other commodities.

But it is not a commodity that will give you returns. Hence, it should be used for what it is good at, that is, a hedge against inflation. Timothy Green, a well-known gold expert, reminds us of a historical truth: “The great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credential”.

A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. Its purchasing power in the mid-20th century was found to be nearly the same as in the middle of the 17th century.

Let investment grade (pure gold coins and bars) gold not be more than 5-10 per cent of your financial investment portfolio, as a cushion to manage inflation and emergencies. Count gold jewels as expenses, not as savings or investments.

What about my daughter’s marriage? There are well-meaning parents who are in the practice of buying small gold coins and trinkets every month/every year for their daughter’s marriage. They do this in an earnest effort to build a kitty of gold which can be made into jewels at the time of marriage, say 21 years hence. But their efforts are in vain. It is clear from the table that this is not going to be fruitful. Is there an alternative approach? Yes. We recommend the following approach as explained in Table 3.

Can you see the logic now? If you had invested in the companies in the Sensex (an index fund would have done the job on your behalf), sold it about a month before your daughter’s marriage and bought gold with it, you would have an amazing 20 times more gold. This is in spite of repeated stock market scams, terrorism, change of governments and policies, oil selling at $126 a barrel, weather wrecking havoc across the globe, and economic turmoil in different parts of the world, including India.

I can see you smirk. You think the stock market is a gamble? Not for the long-term investor. In fact, the reason I chose the Sensex for this presentation and not any particular stock, is to overcome this objection.

We love gold. But it is a financial infatuation. Let this false feeling not be an impediment/hindrance to achieve a real and necessary financial freedom.

By buying gold, we are limiting our economic progress, as the metal, which could be invested for the development of a nation is locked up in our houses and lockers and on ourselves as jewellery.

Treat gold as a portfolio component to match inflation. It will serve you at its best that way. And if you truly love your children/friend/spouse, do not buy gold coins and jewellery; instead, buy them an index fund for the same value.

More Stories on : Gold & Silver | Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Plan your wedding finances well

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line