The price correction in gold is an opportunity for policy-makers to educate the public on alternative investment options.
Over the last two years, policymakers have tried one gambit after another to curb the prodigious appetite among Indian households for gold. These have hiked the import duty on gold twice in the last one year. The anti-money laundering law, too, has been amended recently to provide for enforcement of Know-Your-Customer or KYC norms for any retail gold jewellery purchase valued at Rs 50,000 or more. Both measures have their limitations. Any duty hike beyond the current level is certain to trigger a grey market in gold, with its implications for internal security. Similarly, while the imposition of the KYC norms might, in the long run, widen the tax base, it is unlikely for now to dampen demand for the yellow metal. Rather than resorting to panic measures, the Government can actually draw consolation from the recent correction in global prices that presents an opportunity to educate investors about the true risk-return characteristics of the yellow metal. Policymakers should seize this moment to convince investors that financial assets are just as good in delivering inflation-beating returns.
The current year so far has been unusual, with gold prices declining by about 4 per cent in dollar terms after twelve straight years of gains. Growing indications of an American economic recovery, resulting in a rebound in the dollar and also equity and housing markets, have prompted institutional investors – including the likes of George Soros – to reduce their gold price-linked exchange-traded fund holdings. As they have reallocated their money to other asset classes, questions are being increasingly raised over the sustainability of gold’s decade-long bull-run. Even in the Indian context, the one-year returns of about 6 per cent on gold funds are no longer looking impressive, when compared with equity (8 per cent) or even debt funds (9 per cent).
This, then, opens up an opportunity for not only policymakers, but even financial product vendors such as mutual funds to demonstrate to investors that gold is neither a sure-fire nor a risk-free bet. They could, perhaps, kick-start an investor awareness campaign, showing with numbers how gold is subject to cyclical swings in returns just as equities or other commodities are, and price volatility can result in capital erosion in this case as well. If that helps convey to investors, the risk of loading one’s portfolio with excessive amounts of gold, they may well be tempted to look at alternative avenues for parking their savings. After all, ‘investment’ demand for gold, whether in the form of bar, coin or paper, has accounted for well over a third of India’s annual gold consumption in recent years. If historical trends in savings are any evidence, investors in India are return-chasers and they actively re-allocate money to the options delivering the highest returns in the recent past. Policymakers could also use this moment to push ahead with the launch of inflation-indexed bonds, similar to the Treasury Inflation Protected Securities or TIPS offered in many developed markets.
Keywords: price correction in gold, policy-makers, alternative investment options, money and investing
Comments:
Could the writer be more specific and actually say which asset class to invest in? From 2008, equity and equity based mutual funds have been on a roller coaster ride, return on debt instruments do not even cover retail price inflation and property is slow and clumsy and cannot be traded easily. Holding cash means getting poorer by 10% every year in real terms. So again, where does one invest in?
The editor is living in fool's paradise.Just because you guys have passed some stupid arts course and journalism, you start thinking people are idiots.People buy gold because it has sustaining value over a long period of time.Apart from gold, they invest heavily on land/flat.They know the dubious specimens who run our government will keep printing money to squander away in all "nehru"dynasty schemes,the stock exchanges contain corporates who misguide,mislead and downright dishonest "barons" who sponge off money by colluding with politicians.So no amount of "education" will hoodwink the public to handover their hard earned money to the scoundrels.The whopping inflation which you guys are misreporting has woken up the public not to trust you guys in media or the government.I suggest journalists to get off their backsides and comfortable airconditioned offices, go around and talk to all sections of society who are investing heavily in gold.You guys will get a lesson of life time.
Gold, historically, has played a major role in the form of savings instrument in our economy and has worked as a bulwark against the rainy days for many, especially to those who still carry the traditional values and lessons, bequeathed among them by their ancestors. Therefore the necessity for educating people in the rural areas where the exposure of modern education and accountancy for survival have not gathered momentum and people are still struggling to make both make both ends meet (though the government's claim is on contrary)! All said and done, in the present circumstances when the dire need of the hour is to divert peoples' savings in the market instruments for generating a huge corpus in invigorating our economy, it will be a wise take if your call, "Policymakers should seize this moment to convince investors that financial assets are just as good in delivering inflation-beating returns" is taken seriously by all the stakeholders for action.
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