CASE STUDY FOR GOLD AS PERSONAL INVESTMENT

 

CASE STUDY FOR GOLD AS PERSONAL INVESTMENT

Much has been said about gold and case has been made often regarding investment into it and against it in equal measure.

There have been qualitative and quantitative case studies done and articles written.

Recently a friend of mine suggested some opposition to my suggestion of buying gold as a bullion for personal saving or investment. As per him it is a very unpatriotic action as it leads to a stress on the GDP. When I suggested that this was more as a suggestion for our local group of friends who are there with a common goal of investment for retirement planning he very sensibly pointed out that if each of those members suggests the same thing to further 20 people. This point of his was also very valid.

But something that we forget while planning for ourselves and our family is that personal finance is all about personal and it happens within the ambit of national laws regarding wealth   acquisition accumulation  and taxation. At no point  any citizen can or should try to circumvent those laws.

However same is not applicable for the government. It can change its laws every year during budget and even 12 times during the year or as often as it likes.

It can even change the law of making the laws to  suit itself.

For example if at the end of the month you have to pay more bills then the salary which you earn , your bank balance will show red and if you do not have any other monitory asset you can be declared  bankrupt etc. It's not that difficult with the government. It's budget is first designed to spend and then to collect the money towards those spendings.

If after 1 year it is found and as it is found every year that they have not collected enough money for those expenditures they can take that money from RBI LIC different PSU companies or even from the nationalized banks as dividend. It can further raise your taxes ,duties ,tolls surcharges. And if even then it cannot make up for the losses... Then it can print more currency. It can also sell off its gold holdings with the RBI. And all this will be within the law.

Not so much for you. You not only have to take care of your own expenses but also those of the government. Somehow you cannot print your notes either !!!

With all these events there can be some extraordinary events like economic liberalization and devaluation of the Indian currency in 1991 or the demonetisation of 2016 or the Kargil war or the Covid lock down or the present Russian war... And all these will have a direct bearing on your financial situation and and personal well being.

And you can further add to these some changes in your personal and family life disasters like death illness or accident. In none of these events will the government step in to be in sympathy with you or give you the benefit of all the taxes that you have paid so far.

With so many changes that have happened already in the past 25 to 30 years and so many which can be further not imagined for the next few years... All you have to left to backup is your saving and investments in various asset classes.

Amongst all these asset classes equity no doubt rates  number one in the wealth creation. To counter the volatility of equity one invest in Bank fixed deposits and the fixed income funds. However this asset class also suffers a big disadvantage of firstly having a low sub inflation return and a heavy taxation on top of it hence delivering a big whammy.

And though most of these asset classes keep changing their form every few years and even as the fact that none of the world's currencies are more than even 100 years old in the present form ,the only asset class which has been standard for just a few thousands of years and not changed this form and has been universally accepted is- Gold.

It is the only form of a naturally occurring commodity which is recognised and respected across the world and in every nook and cranny of the world.

Even though gold has given a fairly high return across a substantial and equivalent number of years as other asset classes of fixed type it stands much superior to them for the purpose of portability acceptance and bartered for any range of goods or services.

There was a report of the working group to study the issues related to gold imports and gold loans in February 2013  by the RBI. And even before  addressing the issue of controlling the gold imports almost 9 years ago from today the paper starts with the following...

" Any attempt to moderate the demand for gold is an arduous and complex task.

The nature of demand for gold in India is not strictly comparable with that of demand for Golden many other countries as over 1.3 billion population of India would invariably continue to create demand for gold imports due to cultural religious economic and social reasons.

AWARENESS ABOUT GOLD AS A LUCRATIVE INVESTMENT AND STORE OF WEALTH IS GROWING AND HENCE IT IS DIFFICULT TO BREAK THE LURE FOR GOLD FROM BOTH THE INVESTORS AND JEWELLERY CONSUMERS. DEMAND FOR GOLD IN INDIA IS AUTONOMOUS AND MAY NOT BE AVAILABLE FOR REDUCTION THROUGH POLICY INTERVENTION.

SEVERAL STUDIES HAVE EMPIRICALLY VALIDATED THAT GOLD CAN BE REGARDED AS A LONG RUN INFLATION HEDGE. ABSENCE OF ANY CLOSE SUBSTITUTE TO GOLD AS AN INVESTMENT ASSET WITH THE HIGH LIQUIDITY GOLD CAN OFFER IS ONE MAJOR REASON WHY GOLD HAS BECOME A MUCH PREFERRED ASSET.

This is what the 400 page report starts with. It accepts that gold can you regarding as a long run inflation ahead and there is no substitute to go doesn't investment with high liquidity. IT ALSO VERY SHEEPISHLY ADMITS THAT 1.3 BILLION INDIANS ARE RIGHT AND BETTER ECONOMISTS THAN THE ENTIRE WORLD BANK, IMF ,US AND THE DEVELOPED COUNTRIES COMBINED AND PUT TOGETHER

It is only after this study by the RBI that it started releasing licences for nbfcs offering gold loans. These gold loans proved to be good for both the investor and the lender as it provides a secured loan for the nb fc and the possibility of immediately liquidating for the gold holder.

WHY PHYSICAL GOLD IS BETTER THAN ITS CORRESPONDING PAPER FORM:

APART FROM THE GOLD ETF THERE HAVE BEEN MANY ATTEMPTS AT LURING THE PEOPLE TO BUY GOLD IN E OR ELECTRONIC FORM AND KEEP THEM SECURE WHETHER DEPOSITORY.

Once such used to be the MCX which used to offer e-silver and E gold. This gold had the option of being converted to bullion at the time of delivery if required by the customer or investor.

After few years of operation the exchange itself was shut down by the government on account of violations of some laws.

In 2015 government introduced to simultaneous plans  for monetization of gold to which did not find many takers. Second was the sovereign gold bonds which were offered with some paltry rate of interest and also tax benefit if the gold bonds were kept up to maturity. The takers to these are also in minority as compared to the buyers of physical gold. The reason of which can be attributed to either the cultural and mental makeup of possessing gold in physical form or its reluctance at trusting the government. The third reason may of course is that the transaction has to be conducted in cash or equivalent.

Various personal, National and international disasters have proven that it is only gold which could keep the people survival and  afloat 

During such Times one should not try to become an economist or patriotic nationalist. It is one's duty to make ones wealth grow through legitimate and proper means utilising the financial freedom which the government offers in terms of taxation. The gold which you possess may give you less returns but it does not carry the annual taxation of a fixed deposit or the capital gains in case you're offering the gold for equivalent good or services.

The trend of the world governments is to convert everyone's assets and monetize them not only into paper but electronic formats. I personally feel (even as a proponent of equity investor) that this over dependence on digital format of wealth can prove to be disastrous in case of a element attacking a common format or  a depository.

In simple language it means that if all your money ,mutual funds, stocks, fds ,debt funds, PPF ,NPS etc are centralised in one place then it does not take too much time to evaporate in case of natural or artificial attack on the mode of electronic holding.

In short all I suggest  is that do not try to align your own interest with those of the government, they run parallel or even divergent as far as you go as a high networth individual.

With leaving some food for thought on the proverbial table I rest my case.