Traditions define your being. That is the reason why you are bound to them. They have survived the test of time. There may not be any scientific proof of the benefits to humanity of all traditions. A lot of them are followed due to beliefs that are centuries old. Piling up gold is one such tradition in India. The World Gold Council, a global industry body, estimates that Indian households are sitting on a pile of nearly 25,000 tonnes of gold. That is besides the 500-600 tonnes of gold held by the Reserve of India as strategic reserves. The estimated value of the gold held in India is over $1.5 trillion. That is almost $ 1,000 per individual or Rs 82,000 worth of gold. That is over a third of the per capita income in India.
To put that in perspective, it is more than a third of India’s GDP, about three-fourths of the size of money in bank deposits. The value of gold is about four times more than the money invested in mutual funds and eight times that in equity funds.
Understandably, people want to follow traditions and pile up gold. They want to use it when things are tough. According to one report by Bloomberg, a global news agency, Mannapuram Finance and Muthoot Finance, two non-banking finance companies, are the 23rd largest holders of gold in the world. That is if you consider them as a country. The two companies lend money to Indians and use the gold they own as a pledge.
The above numbers tell you the story of the way most of you manage your wealth. There is a strong affinity to the yellow metal. One can safely assume that households that manage to create a monthly investible surplus in India ensure a decent stock of gold.
If you are holding gold for traditional reasons, that should be fine. It is hard to argue with traditions and emotions attached to those traditions. However, if you are hoarding gold as an investment, you need to expand the scope of your knowledge about investments. The rising inflationary trend in India has pushed many of you to seek refuge in gold. You have little or no confidence in financial assets. However, the cyclical nature of markets presents an opportunity for you to generate a steady return on investment that beats all other asset classes. The idea of investing in equity assets is not to do better than gold, real estate or other competing asset classes. Your objective must be to beat inflation.
Gold prices do well when interest rates are lower than inflation. However, with inflation targeting being the only objective of monetary policy, central banks like the Reserve Bank of India do not hesitate to keep them high or raise them. Their objective of existence is solely to keep inflation within a targeted range. That was not the case in the past.
There are multiple fallouts of an inflation-targeting monetary policy. As inflation reverts to a predictable pattern, businesses benefit through low-cost funds. They can use that money to expand their business and profits further. An interest rate regime that remains stable or trends lower benefits equity markets.
India needs to grow faster to keep up with the needs of the people. There are predictions that India will soon become the third-largest economy and the second-largest over the next 50 years. If that happens, businesses have to grow profits at a secular rate. As a thumb rule, investors expect businesses relying on domestic growth to grow profits at twice the rate of GDP growth.
A simple investment in an exchange-traded fund based on benchmark indices like the Sensex or the Nifty can generate an inflation-beating return. With a system to check inflation and businesses looking to expand and ride on growth, there is no hurdle for India’s stock markets. For savers and investors, it presents an opportunity like never before. Most pundits recommend not more than 10-15% weight for gold in a household investment portfolio. You can consult your financial advisor and work on an appropriate asset allocation.