Why India’s Tradition of Storing Gold is Savvy, not Silly

Reserve Bank of India, Deputy Governor K C Chakrabarty. is a little miffed about India’s current account deficit and the value of the currency. He blames gold and India’s ancient traditions for his country’s woes.

‘Ninety percent of the gold demand is jewellery or to offer to God. Both have to stop. Wearing gold as an ornament was a culture when you were a rich society, when you were contributing to 30% of the GDP of the world. Today, we have become a poor country, we need to change our culture.’

Mr Chakrabarty goes on to say that gold is a speculative and unproductive investment and its price will fall sharply when the speculators exit the market. We would guess most Indians will respond to the advice with a yawn, if not a laugh.

It is this type of Orwellian gibberish you come to expect from central bankers. The producers of paper money always rail against gold’s ability to shine a light on their ineptitude.

In one respect he’s right though. Gold as an investment is unproductive. But as a long term store of value it is unrivalled. And Indians, long weary of inflation, corruption and economic mismanagement, know this only too well. Throw in the natural volatility of an economy highly dependent on agriculture, and the store of wealth thing tends to become ingrained.

Is putting your savings into US government debt, at less than 1.5% for ten years, any more productive? A large chunk of the US budget now goes towards welfare. It is prudent to give your savings to a government who then facilities the consumption of those savings? All you get in return is a piece of paper promising future repayment, the real value of which is unknown.

So we would suggest that by storing their savings in gold, the Indians are actually quite savvy. In the absence of a better alternative (as in one with a better risk/reward profile) why not focus on the preservation of your wealth and bypass the ‘system’.


Greg Canavan
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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