Gold has a special place in the Indian culture, or so it has been for centuries. But, does it really warrant such attention and value in our minds? Perhaps, it did serve as a great substitute for paper money, in fact, for a long time Central banks could not print more money than there was Gold in their reserves to back the paper currency so there was a great deal to be said about the value of gold. However, much has changed and while the ‘Gold standard’ (the above mentioned rule was called) is a topic for another article, let us discuss a little bit about Gold and it’s real ‘Value’.
What is the real Value of Gold?
When we say Gold is valuable, what do we mean by ‘Value’?. Well, ‘Value’ can be broken down in two parts. Firstly, the ‘Use Value’ of anything can be found out by applying a simple test. Imagine that if the government bans the sale and purchase of Gold from this moment onwards, would Gold still be as valuable? The answer, as far as the ‘use value’ is concerned would probably be NO.
I mean, you don’t really need gold to drive your car, or to access the Internet or to build roads or mostly in any other aspect of life. However, if we were to apply the same test to Steel, for instance, we can rightly imagine that it’ll be impossible for the world to function without it.
From cars, to kitchen, to buildings to you-name-whatever-it-is, Steel is used everywhere, and banning it would mean the collapse of our civilisation. Therefore, we can say that steel has ‘Use’ value while Gold has none, or at least far far less than steel does.
‘Perception’ value on the other hand is slightly more challenging to assess, since it is mainly derived from how a certain object is perceived. Gold, in India, is synonymous with social status and wealth and for this reason wearing gold at weddings and family gatherings is commonplace. But this behaviour causes a serious damage to the economy as a whole, which is that we, as a country, import the largest quantity of the yellow metal in the world and as a consequence most of the country’s wealth is locked in a dead asset (one that doesn’t put money in your pocket regularly). Had this amount been invested into productive assets such as stocks, India wouldn’t have to ask for foreign investments to the scale it’s having to do so. Lack of retail investors investing in productive assets such as corporations (You & me) leaves the government with no choice but to make huge borrowings from countries such as China, Russia, and Japan, which will also reap the benefit of returns.
Some number concerning Gold.
is yet another aspect of buying Gold that often bypasses our view when considering Gold as an investment. We can almost guarantee these figures will shatter the illusion you have about the GOLD until now:
|GOLD (Price/oz) $||$ 820||$ 1117||0.88%|
|GOLD (Price/oz) ₹||₹5000||₹71488||7.89%|
CAGR*: Is the Compounded annual Growth rate, or the rate by which you money or investment grows on an yearly basis. Note that it is different from Simple Interest in that rate is calculated on the same principal amount year after, while in Compound interest rate is calculated on Principal+interest for previous year.
Something unusual is happening here. In $ terms, the price/oz went from $820 to $1117 in 35 years. But surprisingly (or not so surprisingly), in ₹ terms it jumped from ₹5000 to ₹71488. Why such a striking difference? You see in 1980, 1$= ₹10 but by 2015 $1=₹64. Meaning that the big jump in prices of gold that we’ve seen in the past is because the $ became 6.4 times stronger in the past 35 years or because ₹ has become weaker by 6.4 times. What this simply means is that we can buy less for a ₹1 today than we could’ve 35 years ago. Ever noticed how our Grandparents always seem to be saying ‘Oh we used to buy a kilo of rice for ₹5 in our time!’, remember that one?.
So it brings us to the uncomfortable truth that you wouldn’t like to hear, which is that Gold isn’t an investment at all!! In fact, it has proven to be such a poor investment that you could’ve earned 17 times your money just by keeping it in the bank itself and could’ve made a whopping 24 times your money in the stock market over the said period. Moreover, while Gold rose by 0.88%, money in the Bank and Sensex rose by 10% (approx.) and 17.47% annually.
A sum of ₹10,000 used to buy gold @0.887% resulted in a sum of ₹13,631 in 35 years, while the same sum of ₹10,000 kept in the bank @10% totaled ₹ 2,81,024
Now dare to imagine what ₹10,000 would amount to at 15% (SENSEX CAGR for last 35 years)– ₹1,331,755.74 (24.3 lac). So next time you’re willing to ‘invest’ in Gold, think again! And then think again until you’ve successfully talked yourself out of it.
Thanks for reading !
The Author is a member of the EIFS Team and a CFA candidate.
- https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765 (A rate of 10% has been assumed since in 1980 since 10% was the ROR on deposits> 5 year terms at the time)
- The amount is compounded annually according to key deposit rates for term deposits>5 years. The data can be viewed by visiting https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765