Gold Mistake

Akshay Tritiya, the festival which is associated with buying gold, is here. I could be wrong but historically, the festival of Akshay Tritiya as a gold buying occasion was quite specific to some communities and some parts of the country. I grew up in a fairly traditional environment in North India and had literally never heard the name till I came across it in advertising by a bank, perhaps around 2007 or so. However, over these years, businesses offering various investment products based on gold have systematically promoted the gold buying idea and now this is a fairly well-established day to do so across much of the country.

Of course, The Indian psyche is hardwired to view gold as an investment. The interesting point is that while the tradition was obviously entirely of buying gold jewellery, the promotional push has now involved every form of ‘paper gold’. Investment apart, the logic of gold jewellery as streedhan in a patriarchal society is perfect. However, things are a little different now and I’m not sure whether gold has the same characteristics as an investment anymore. The rise of ‘paper gold’, which is gold-derived financial instruments, has converted gold into yet another financial asset. Which is okay, I suppose, because that’s the way things are right now, and financialized gold products do have many qualities that make them superior investments, despite the fact that it don’t offer the same satisfaction that actual gold can.

The best I can say is that historically, gold was a good store of value and some of that survives till today. However, it is not good as an investment. Over long periods of time, rising gold prices give an illusion that the returns are good. For example, over about 40 years (from 1981 to 2021, March 31 numbers), the price of gold has gone up 29 times, from Rs 1800 for 10 gm to Rs 48,720. That sounds amazing, doesn’t it? Well, over the same period, the Sensex has gone from 173 points to 49,509. That’s 338 times! There is no comparison, at all. Gold is somewhat better than inflation, depending on how you measure inflation but that’s about it. It just stores value – there is no meaningful appreciation.

This is true, sometimes but it’s not a sure shot thing in severe crises.

The bottom line is gold is not a great investment and no one should hold any significant amount of gold for investment purposes. However, if you are unable to fully escape a few thousand years of beliefs and must necessarily buy gold, then sovereign gold bonds are the best way of holding gold and jewellery is the worst. In fact, jewellery was never a great option. Even for physical gold, for investment purposes, gold coins have always been the sensible choice. Essentially, there are two types of non-physical investment in gold available in India, Gold ETFs/gold funds and sovereign gold bonds.

Till 2015, before the bond scheme was introduced, ETFs and funds were the best way to own paper gold but now, SGB is the better choice. It replicates the returns (positive or negative) of gold, but also pays you an interest of 2.5 percent per annum.

Of course, do understand that I’m saying all this under pressure, so to speak, just because people keep asking. Personally, I do not invest in gold, and I don’t think anyone should but if you have to do it then SGBs are the least worst way of doing so.