EVEN POST DEMONETIZATION, GOLD WILL SHINE BRIGHT IN LONG RUN

By Ruma Dubey

Hansaben’s daughter is getting married next month and she was waiting for 14th Jan, the beginning of the ‘auspicious’ month to buy the gold. But before she could get the money arranged and get to the shop, demonetization happened and she realized that all the cash – Rs.500 and Rs1000 notes with which she hopes to buy gold could soon become useless.

Her jeweler said that she could buy gold but with either a debit card or with new notes. This was his “official” version when she went to his shop to enquire. Later, he called her up and said that she could buy 10 tolas of gold for Rs.5.5 lakh and all to be paid in old notes. This was almost double the price of the prevailing market rate of gold but Hansaben felt this was the best deal and went for it. Today, many households who had hoards of “old” notes and not many bank accounts to ‘adjust’ it with have done what Hansaben has done. The unofficial rate remains in the range of Rs.50,000 to Rs.60,000 for a tola (10 gms) of gold.

In the midst of this mindless conversion of old notes into very expensive gold, price of gold has been falling down - it will continue to do so till Yellen announces the rate hike. Gold prices are inversely related to interest rates - gold prices move down it rates are hiked and vice versa. The Indian Govt too clarified that it was not going to seize lockers and take away gold as long as one could legitimize the gold owned. But the word on the street is that gold might be getting ready to lose its shine; yet are the Indian women ready to accept this hard truth?

Various gold analysts confer that the immediate demand outlook for the metal remains weak as cash runs dry, especially in key rural markets, the key consumers of gold. And according to World Gold Council, gold demand is estimated to hit a seven-year low to remain in the range of 650-750 tonnes in 2016. But at the same time, most agree that in the long run, once this note ban furor settles, demand will once again pick up and in fact the industry will become a big beneficiary of the demonetization. As new notes will come in and more jewelers adapt online/card payments, the pent up demand will spur the gold prices in a big way.

Buying gold is mandatory for weddings in India thus as long as weddings happen, irrespective of demonetization or not, gold will be purchased.

Maybe it is time for us consumers to let go this penchant for the yellow metal. If we all opt for light weight jewellery for marriages and ceremonies, wont we automatically shut down smuggling and clamp down on the greedy jewelers? Why this fascination for gold? Yes, it is currently the only hedge against inflation but then, the market seems to be bottoming out and surely there are better opportunities there too. Frankly, who sells gold to tide over inflation? Selling gold is like the last resort and rarely does that happen. So are we buying gold to simply hoard in the safe deposit boxes and feel happy about the notional gains made?

Sentiments are improving, maybe the Govt needs to work extra hard on looking at ways and means to boost exports and get in more capital inflows. Yes, gold as a jewellery given its cost, is risky to wear and flaunt. Women buy gold but wear imitation jewellery when they need to go out. So why are we spending so much money on something which, in actual sense is useless, just a piece of metal in the safe? It is dug out from one “mine” to only be stored in another safe which you call “mine”.

And did you know that Warren Buffett does not invest in gold? He said famously in a TV interview, “If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.”