In India, we love things we can cling to. Gold, essentially, becomes a natural asset most Indians like to own. We import nearly a 1,000 tonnes of gold each year as a country. However, gold is not an investment.
Warren Buffett, the legendary American investor, who oversees Berkshire Hathaway at 88, never misses an opportunity to hit out at the idea of investing in gold. Late last month, he wrote in his annual letter to shareholders of Berkshire Hathaway that an investment in gold would be worth only a fraction of that in an index fund over his 77-year-old lifetime.
People buy gold when there is uncertainty. The fear of the unknown makes people pick safety over risk. In America, if people were scared of uncertainty after a dramatic surge in the government deficits and worried about a potential fall in value of the US dollar, they would have bought gold. Budget deficits did balloon dramatically. They are high even today in America. However, there was no collapse of the US dollar. Stock markets in the US surged to record highs, and foreign investment into America continued unabated. The US dollar became the world reserve currency. Every country wants to trade and use dollar-denominated assets.
The US Federal Reserve estimates that the American household wealth around $104 trillion. That is a good 40 times higher than India’s economy measured by gross domestic product. We cannot even imagine a number that big.
American households did not hoard gold to create that wealth. They owned financial assets to get there. Index investing in the 70s and 80s channelised retirement savings into financial assets like equities. That gave the necessary depth to US stock markets. American companies could easily go public and expanded businesses in the US around the world over several decades. It created a cycle that continues to keep the American dream alive. It attracts many immigrants even today.
What is our problem
We certainly do not believe in the power of financial assets. Less than 23 per cent of Indian households own financial assets like fixed deposits, mutual funds or stocks, according to an RBI survey published two years ago. One can safely say that the number may not have changed much now. Mutual funds continue to languish at less than 2 crore unique folios while the number of demat accounts hovers around 2.5 crore. In a country of 130 crore people, these are pretty small numbers. All this is pretty much after the push financial assets got after demonetisation.
Gold is primarily a hedge against potential risk. If you ask financial planning experts, they would say that it should not be more than 5-10% of your overall investments. However, most of the gold in India is owned through jewellery. That is treated as an investment. People buy gold coins, biscuits or bars.
It is understandable if you are buying gold for your religious belief and rituals. They are more emotionally driven decisions. Your investments have to be rational.
Gold prices have moved to `32,000 per 10gm today from `28,000 per 10gm in 2014. In the meantime, the BSE Sensex has grown to 36,000 from 21,000. If you take a period of 30 years, gold has moved to the current level from `3,140, a gain of only 10 times since 1989.
The Sensex in 1989 was 770.
What can you do
You may want to have a serious conversation with everyone in the house. It may be a good idea to decide the quantity of gold that is good enough to own. It may not be easy as you are disrupting a way of investment or savings.
However, simply discussing investments that do not include gold is a good beginning. You must speak to a financial advisor on the concept of asset allocation. This is a method to decide on the allocation of your investment every month or through any period. It is based on your dreams, goals, income and your ability to take the risk.
The historical evidence is in front of you. Equity assets outperform any other form of an asset over the long-term. An index fund over the past 30 years that mirrored the performance of the Sensex would have easily done much better than gold. Such funds did not exist in India then. But they do now. You can ask your financial advisor to help you identify the right one.