Gold – Are Indian People Smarter than Indian Finance Officials & Media?

Finances of the Indian Government are a disaster or at best a disaster waiting to happen. This is not news to any one who even remotely looks at the policies of the Indian Government. Large fiscal deficits, runaway spending, rampant corruption are among the most obvious problems. The Indian people can’t really do anything about the financial mess imposed on them. After all, India is a democracy only in name.

But there is one area where the Indian people make a difference and they do make a huge difference. Recently, India’s Finance Minister Chidambaram blamed India’s gaping current account deficit on the Indian people, specifically their purchases of gold. Minister Chidambaram argued that India’s current account deficit could vanish if Indians stopped importing gold. (India does not produce gold; so all the gold bought by Indians is imported creating a current account problem)

After all, it isn’t as if Indian families don’t already own gold. According to an article in the Wall Street Journal:

  • India’s private gold holdings probably total 15,000 tons, according to
    an estimate by Citigroup analysts in May. Some jewelers like T.K.
    Chandiran of Coimbatore thinks this number is too conservative, and the
    real amount is more like 30,000 tons, counting other hidden temple

This is almost 1/3rd of India’s GDP, an enormous amount of wealth stored in the personal safes of Indian families. Another way to measure it is to compare above private Indian ownership to the three largest sovereign gold reserves in the world:

But this ginormous ownership has not dimmed the Indian appetite for Gold. Every year, Indian families buy more gold without selling what they own. This is true of all economic strata from the extremely rich, to the mere rich to the urban middle class and to the rural class that lives in India’s villages.

The Indian Government is hungry to get its hands on this unproductive wealth sitting in safes & vaults of  Indian families. They want to get this wealth into the Indian economic system where it can be used as a multiplier for growth. The Indian Government has offered incentives to persuade owners of gold to buy stocks listed on India’s exchanges arguing stocks will deliver greater wealth creation than the gold sitting in safes & bank vaults.

The Indian media is just as eager to sell the message. For example, the Wall Street Journal article discusses ways in which this private gold collection can be put to “productive” use. A Hindustan Times article attempts to explain away the desire of Indian families for Gold. These media articles have the same undertone of “how dumb are Indians” group think.

Frankly, these writers are wrong and dumb. The Indian people are actually the smart ones. Their love of Gold is based on the soundest of wealth preservation principles. To understand this, ask the basic question – what is Gold?

Gold is not a bond or a fixed deposit in a bank. It doesn’t pay any interest. Gold is not a stock. It doesn’t pay a dividend and it is not based on the value or cash flows of a company. Gold is not a commodity like Oil, Copper that is used in the economy. Nor is it a necessary commodity like agricultural products. So what is Gold?

Gold is a currency, a store of value. That is how it has been used since the most ancient of days. According to the ancient text Katha-Sarit-Sagar*, the last Nand Emperor (Dhan-Nand circa 325 BCE) owned 990 million gold pieces, yes 990 million gold pieces. More recently, European farmers used to store their wealth in gold and bury it in various places in their farms.

As a currency, Gold is not to be considered a stand alone asset. It has to be measured in terms of your currency. If you live in a country whose currency is stable and unlikely to collapse, you don’t need to own gold. This is why in America, the country with the world’s reserve currency, you don’t find a preoccupation with gold. Over the long term, productive assets like stocks, real assets will provide greater returns than gold.

But even in America, gold has outperformed most other assets since 1998, the year the U.S. Federal Reserve began creating bubbles by pumping in liquidity into the American system. Such liquidity pumping almost always debases the currency and increases the value of gold measured in that currency. 

This simple fact is what the Indian people have understood instinctively. In 1974, 7.5 Indian Rupees bought one U.S. Dollar. Today, 55 Indian Rupees are required to buy on U.S. Dollar. 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. Does this explain why Indian families have been exceedingly smart in owning gold for the long term and why they keep buying more gold every year? They know instinctively that the Indian Rupee will lose its value every year and keep losing it continuously.

So Indians don’t buy gold because they are dumb as their media thinks. They buy Gold versus the Indian Rupee, because they are smart, very smart.

* page 34, The Age of Imperial Unity – History & Culture of the Indian People – Bharatiya Vidya Bhavan series

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