Indian Investors in Gold/USD vs. Overseas Investors in India – Who are Smarter?

The passion of Indian investors for Gold is well known. Most reporters in the American media laugh at this practice and attribute it to backwardness of Indian investors. The laugh is on these reporters we demonstrated in our March 23, 2013 article titled Gold – Are Indian People Smarter than Indian Finance Officials & Media?   

In that article, we illustrated this smartness by giving the following example:

  • “So an Indian
    family with one million Indian rupees in savings would have seen their
    value drop from  U.S. dollar 133,333 in 1974 to 18,181 dollars today, a
    drop in wealth of 84%. Had the same Indian family bought gold with that
    million rupees in 1974 (at $361 per ounce), it would be worth $581,717 today (at $1,575 per ounce).”
  • “This difference of
    having $581,717 versus having $18,181 is the difference between an
    Indian family keeping their million rupees in gold versus keeping it in
    Indian rupees”

What happens after such an article praising investors for buying any asset? That asset promptly goes down. Not only did Gold go down within a few weeks of our article, it suffered a crash. Did that crash panic Indian investors or diminish their ardor for Gold?

You know the answer. The precipitous drop in the price of Gold created a virtual buying panic among Indian investors. Bloomberg described this rush to buy in their April 26, 2013 article titled Gold Buyers Throng Indian Stores for Second Week on Rally. According to this article,

  • Gold consumers in India, the world’s biggest importer, thronged jewelry stores across the
    country for a second week on speculation that bullion may extend a rally
    after the biggest plunge in three decades.
  • “We waited for sometime to see if prices will fall more but when we saw
    them moving up again, we decided it’s time,” said Sripal Jain, a
    77-year-old silver dealer who came with his younger brother, daughter
    and daughter-in-law to buy gold necklaces at Mumbai’s Zaveri Bazaar. “We
    don’t have any wedding or occasion coming up. The rates fell, so we
    decided to buy.”
  • Everyone is thinking that they will miss the bus if they don’t buy now
    as prices have started moving up
    ,” said Ramesh Pahlajani, partner at
    Mumbai-based Bherumal Shamandas Jewellers. “Demand has been very good
    since last week.”

This is classic Indian behavior, the same behavior that prompted overseas Indians to pour money into Indian Rupee deposits in January 2012 after a 20% crash in the Indian Rupee in the 4th quarter of 2011. That inpouring of overseas money was triggered by Indian Banks offering 10% interest on 1-year & 2-year CDs. The attraction of a 10% interest rate and the first ever chance to buy Indian rupees above 50 Rs/$ created a buying panic of sorts among Non-Resident Indians (“NRI”). They poured in $5 billion in to Indian Rupee deposits in January 2012. That proved to be utterly stupid because the Rupee fell to 57 by June 2012 and went above Rs. 60 last month. So the allure of interest rate of 10% led  a capital loss of 20% for these NRI investors.

Gold treated Indian buyers to a similar experience this year. On April 26, the date of the Bloomberg article, Gold traded at $140.91 (price of GLD, world’s largest Gold ETF) and today its trades at $128.67, a loss of 9% in less than 3 months. Are Indian buyers of Gold as upset as their NRI counterparts who bought Rupee-based CDs after the first Rupee crash?

No they are not. And why not? Because Gold, unlike CDs, is NOT a standalone asset. As we explained in our March 23, article, Gold is a currency whose value in measured in the underlying currency of the buyers, in this case in Indian Rupee terms. And what has happened to the Indian Rupee since April 26, 2013? It fell steeply from 54.22 to 59.13 as of this past Thursday. As a result, the loss in Gold is balanced out by the fall in the Rupee leaving Indian buyers roughly flat. And if Gold rises from here, then Indian buyers will again have made a profitable trade.

Indians don’t buy Gold for the short term. It is mainly a long term capital investment. So how has Gold done since the financial crisis of 2008? We considered the hypothetical case of an Indian family who invested a million Rupees (approx. $17,000) on January 1, 2008 in Gold, in US Dollars or in the Sensex, the index for Indian stocks. What is the result of these three investments as of Thursday, July 25, 2013?

  • US $ investment has appreciated by 50.69%; Gold investment has appreciated by 133.60% while the Sensex investment has gone down by 4.26%.

This demonstrated once again that Gold remains the best investment for Indians. No wonder the demand for Gold never goes down in India in good times and accelerates dramatically during uncertain or slowing economic conditions.

So Indians who buy and keep buying Gold are not backward or unsophisticated as American newspapers portray. Actually they are smart, very smart.

Overseas or Non-Resident (“NRI”) Indians

Most NRI investors also consider themselves more sophisticated than Indians in India. Unfortunately, the facts are not on their side. In reality, NRIs or Overseas Indians tend to invest more emotionally than rationally. Every time, the Rupee suffers a steep fall, NRIs jump into Indian investments, either in high interest CDs, in Indian stocks or in Indian real estate, meaning apartments.

The apartments are a different story. They represent a second home and an emotional desire to have an apartment of their own, back in the homeland where they came from. So we don’t consider that as an investment decision. But what about pure investments in Rupee-CDs and in Indian stocks?

We again considered a hypothetical case of an NRI family investing $100,000 on January 1, 2008 in Indian CDs (bank term deposits) and in Sensex, the index for Indian stocks. How have these investments performed as of July 25, 2013?

  • Indian CD investment has gone down by 33.64% in principal value while providing a 5% after-tax interest (8% nominal return with 40% US taxes) delivering a total return of -6.14%.
  • Sensex investment has been a killer because it is down 36.47% in value.

What is the lesson? People of Indian origin do much better by taking money out of India (that’s what Gold investing does in practical terms) than overseas investors investing US $ money into India. And of course, the obvious lesson – Indians in India have proved smarter than NRIs.

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