(by Anitha Rosline Rajesh)
Stock market guru Warren Buffet once famously described gold as an investment that doesn’t do anything. “It just sits there and looks at you,” he had said while discussing the role of the yellow metal in any investment portfolio.
Of course, the world listens when the Oracle of Omaha speaks and so it was that gold began to be mocked as a ‘dead investment’ and the ‘worst option in human history’.
Of course, one may grudgingly agree to this theory if one were residing in most parts of the world. But, not so in India. Because, in spite of modern youth turning to other precious metals, the fact remains that the yellow metal has not lost its sheen when it comes to adding glitter to any ceremonial event in our country.
Gold prices have touched Rs.3,025/gram, its highest levels since September 2012, forcing those who had sworn by the stock market to lick their wounds following the crash in the broader Indian stock markets last year. For the record, the BSE-500 fell 3.65% while the BSE Small Cap wiped off a whopping 24.89% of investor wealth over the last 12 months!
What made gold shine?
Factors that contributed to higher gold prices were caused by fears of United States’ trade war with China and ongoing tensions with Iran. On Indian shores, the fall of the rupee boosted prices, though it was hardly a year-long phenomenon.
So, what makes gold such a hot favourite in India?
- For starters, Indian families, cutting across social strata, hold a soft corner for gold for multiple reasons, chief among them being the ease of purchasing and storing
- Gold purchases are also considered auspicious, which means families rush to the nearest store to pick up jewellery, even in very small quantities
- Then, there are annual splurges during festivals such as ‘Dhanteras, Diwali and Akshaya Tritiya, the latter becoming a big date for summer sales
- The women in villages use gold as a quick investment options when the family comes into sudden wealth, from a good harvest or a hefty catch – largely as a means to keep their menfolk from spending it recklessly
These are factors that made gold deliver better average returns of 7.3% over the last 12 months compared to 5.9% that the bellwether Sensex returned. Of course, one must remember that both these asset classes gave lower returns than the egregious five-year fixed deposits with banks that returned 8% on average.
Will gold continue to shine in 2019?
Precious money investment services company Goldmoney says in its December 2018 report that with the dollar available aplenty across the world and markets responding as if there is a shortage, things can change drastically when the truth emerges. The report predicts a fall in the dollar against major currencies, which would lead to gold becoming dearer.
For the Indian investors there are a few more factors that will continue to make gold a small investors’ haven in the months ahead. Some of the reasons are:
- Gold is traditionally preferred over other asset classes because stock markets are complicated for the retail investor and the stock indices aren’t always an indicator
- With the real estate bubble bursting a while ago, even the middle-class investors in cities are finding it tough to park their funds in a safe haven
- The third is the global demand scenario that suggests a hoarding of gold by Chinese private sector, accumulation of gold by central banks and a steady demand from India
A fourth reason is the fact that investment in gold are usually in the form of spot purchases by families which require them to spend only within their means, unlike say the real estate asset class or even equity or mutual funds. Current estimates suggest that Indian households have between 23,000-24,000 tonnes of the metal costing a whopping $800 billion.
Make no mistake! Indian households are only interested in physical possession of gold and not in gold bonds. Remember the 2015 scheme where government offered 2.5% annual returns on investment, a semi-annual credit of interest and trading in stock exchanges for multiples of one gram of the metal. Only those who invested in stocks got interested, the rest merely went to the store and bought their trinkets and bangles.
With general elections around the corner and market fluctuations likely to dominate over the next three to four months, gold could well become the commodity that balances out one’s investment portfolio over the next twelve months.