Of all the precious metals, Gold is the most popular as aninvestment and as we know, it’s forever because it’s beautiful, useful andideally never wears out. It has been prized over all else, in all ages as astore of value that will survive the travails of life and ravages of time. Afew thousand years or so, one would have thought, would be enough to decide anargument but it turns out that gold’s utility as an investment is still not asettled matter. Well, there’s the traditional view of gold – it’s simple anduseful investment, a protection against bad times and all households shouldinvest in it. People who believe this, think that gold can be easily liquidatedand can also be relied upon to gain value. Another, more modern view is thatgold is a commodity to be traded just like other commodities, which is not ofmuch use to the individual saver. There’s also a third view, to which Isubscribe and that is, gold can legitimately be seen as an investment and whileit does have some unique features, it’s just not a very good investment optioncompared to a few other asset classes. Any investment must be evaluatedprimarily according to returns, liquidity, stability and other such factorsbeing additional concerns and on these grounds, gold doesn’t score very well.
If we were to compare Gold with other asset classes, thereturns tend to be worse than other investments and there are some fundamentalreasons why this will always be the case. Let’s understand, Gold belongs to aclass of investments that do not actually produce anything or create any value.Any rise in its worth is based on the belief that when the time comes to sell,someone else will pay more for it. Unlike equity or bonds or deposits, themoney that you invest in gold does not contribute to economic growth. Anequivalent amount of money deployed in a business or any other productiveeconomic activity will generate actual wealth and will grow larger in a veryfundamental way, while a given quantity of gold will just remain the same. So,am I saying that no one should ever invest in gold? I believe the answer isclear. For those who are reading this column and therefore must be havingaccess to a modern financial system with all its investment options, gold makesno sense. Gold makes sense only for those who have no access to or no trust inthe financial system. Gold is best viewed as an alternate currency.
Simply put, in order to understand the point I intend tomake here is to step back in time around the demonetisation period – there werestories of housewives who turned out to have secretly saved large amounts ofcash. Those housewives, could surely have done better with gold instead ofcash. If you still must buy gold, then there are many forms of gold(paper/electronic) available. There are gold-backed mutual funds availablewhich closely track the value of gold. However, if you don’t mind locking moneyaway for at least five years, then there are Government gold bonds. Their valueincreases in step with gold, plus there’s an extra interest of 2.5% per year.Unlike gold mutual funds, the gains from the gold bonds are tax-free. The limitis a generous 4 kg per person.
We need to be absolutely clear on one thing – what Gold is and what it’s not. Gold’s placein history and culture makes it difficult for people to accept that gold is nota good investment. We instinctively think of gold as wealth, as a kind of a currencythat survives all kinds of historical troubles. This is undoubtedly true. Goldhas value because everyone thinks it has value. For many people, that’s enough.However, don’t think of it as an investment without understanding the realitybecause historically, Gold has offered as much Inflation protection as cash –which is to say, very little.
(Ifthikar Bashir is a freelance Financial Advisor)