BackEmotional comfort and little else
Buying gold jewellery isn't all that it's made out to be
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Many of my women acquaintances and friends’ mothers keep buying gold coins or gold jewellery regularly, month on month. Their comfort in owning gold as an asset, and even more so as an efficient investment idea, is very high. Contrast this to my personal style of investing. It’s been 15 years since I got married and as a family we have invested precisely nothing in physical gold so far.
Why is it that we prefer to buy physical gold? The Hindu mythology lays a lot of emphasis on gold. King Ravana’s walled capital of Lanka was said to be made of gold. Lord Krishna’s city of Dwarka was said to be made up of gold. Political adviser Chanakya said that gold has all the qualities that can give you a better life and the more you have it, the richer and more accomplished you are.
Every year, some days are considered auspicious for buying gold—Durga Puja, Dhanteras, Akshay Tritiya, Onam, Pongal, among others.
According to the World Gold Council data for 2013, India was replaced by China as the world’s largest gold buying nation, mostly due to the import curbs imposed by the Indian government. Gold imports are the second highest contributor (the first being crude oil) to our current account deficit, which is basically the difference between foreign exchange inflow and outflow. During the previous financial year, the deficit as a percentage of the gross domestic product ballooned thanks partly to record gold imports along with a depreciating currency.
In India, buying gold is really more about adornment, coupled with investment. Most of the gold is bought in the form of jewellery. In many Indian marriages, the amount of gold a new bride has is a matter of great interest. Of course, the more the better. Reasons range from vanity to providing a future for the family since the value of gold rarely falls in turbulent times and investments in gold beat inflation. It is also a way to exhibit wealth and power.
There is, however, a not so apparent thought behind this—that the gold in the family will be passed down generations and act as a safety net in bad times. So, if you need money, sell the gold, or take a loan against it.
However, this kind of stocking up of gold comes with caveats. As they say, “the proof of pudding is in the eating"; accumulating wealth like this stays unproductive if not unlocked through selling it.
To realize the returns of investments made in gold, in any of the above forms, you have to be open to selling it. And that’s something that most Indian women will not be willing to do. Last year, gold prices touched a high of 33,000-34,000 per 10g in India even as international prices were correcting. Logically, selling it then would have been ideal. Historically, the returns on gold (in rupee terms) have been close to 10% year-on-year on a long-term basis. But this is a simple calculation. For all practical purposes, this does not account for making or breaking charges (which could be up to 10% of the market price of gold in an ornament), locker charges for storing the yellow metal, etc.
Moreover, while banks sell gold coins, they do not buy them back from retail customers. Finance companies offer loans to the extent of 75% of the jewellery’s value, and the interest rates can be as high as 26% per year. In addition to that, gold loans are expected to be returned within a year, so you don’t have much time to repay. Therefore, even though you can get money against your jewellery, it may not be as much as you paid for it thanks to the making charges and the high cost of the loan. In effect, customers may draw emotional comfort from gold, but if one were to look at it objectively, investments made in gold may prove to be a drag.
Then there is the segment (clearly a minority) of investors who do not get lured by physical gold. They believe that gold as an asset class needs to be purchased for its investment value or for what it can leave on the table after a certain point of time, which gets addressed by buying it in the electronic and liquid form. But here, too, one must remember that gold investments will give only a capital gain; there is no other form of income such as interest or dividends. So, there is risk depending on how long you want to remain invested. There are other assets that can give you better returns. In fact, today fixed income securities such as tax-free bonds issued by government-owned entities are giving an assured (and tax-free) return of nearly 9%.
While gold prices have risen steadily over a long period of time, on a short to medium term, these can be volatile and susceptible to uncertain global cues.
This discussion on gold as an investment idea won’t be complete without quoting one of the world’s most successful investors, Warren Buffett, who once said “gold doesn’t do anything except look at you".
Deepali Sen is a certified financial planner, and founder and partner at Srujan Financial Advisors LLP.
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