The third quarter of this calendar year saw a 66% rise in gold demand. Softer gold prices, good monsoon, bumper crops and farm loan waivers explain the demand surge. These factors indicate Bharat? rural Indians?is a big gold consumer. Are their investment decisions optimal?
An investment banker, if he finds anyone to listen to him these days, will explain it thus: True, much of gold bought in India seems to be for personal adornement?78% of the third quarter?s sale increase is explained by jewellery. But rural Indians use gold as a hedge against inflation and as a reliable store of value in the long run. Gold is negatively correlated with stocks, bonds and even real estate. This negative correlation, the investment banker will tell you, reduces porfolio volatility.
Granted the demand for gold can?t be changed, can it be better channelled? Gold in form of jewellery sees significant loss of value when sold?some of the price at which it is bought is explained by compensation for design and craftmanship. So gold bars and gold coins are a better option. But there?s a caveat: bars brought from banks can only be sold at jewellery shops. RBI does not allow banks to buy gold back from its customers. Surely, this policy needs a rethink?
There?s also the option of investing in gold funds, instead of in gold directly. These can be easily bought and sold and there are no problems in liquidating the investment. Also, since the underlying gold of the fund is in the form of bullion, there are no losses in terms of design and craftsmanship charges.
The question then is who will tell informationally-disadvantaged rural Indians about better ways to invest in gold.