IS YOUR MONEY WORTH IN GOLD?

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, the Govt hiked import duty on gold from 4% to 6%. Hansaben has nothing to with imported gold yet the price of gold has risen and today, she finds the money she has allocated for gold is falling short. Following the import duty hike, gold prices went up by Rs.315 to Rs.31,250 per 10 grams.  

Well, she says that buying gold cannot be avoided; she may only buy little less and maybe get her brother from Dubai to get some gold when he comes for the wedding. “Get” does not mean declaring the gold at the customs and paying duty; it means wearing it on self and hopefully get through the customs without getting noticed.

This is how it will now be. The Govt wants to bring down it burgeoning current account deficit and with no way left out, it has targeted gold. India imports so much gold that it has become one of the main reasons for mounting current account deficit. But past experience has shown that the moment import duty is hiked, smuggling goes up and that is precisely what will happen now. This will be a self-defeating move like taxing the super-rich – they will only declare lower incomes and park money elsewhere or route money through the black market channels.

And hike in gold import duty seems to be the only method which the Govt knows to curb its deficit. In January 2012, it hiked duty from 1% to 2% and then in March 2012, the Govt doubled the duty from 2% to 4% and now this is the third hike. Is the Govt so naïve as to think that Indians will stop buying gold? Apart from marriages and religious ceremonies, gold has proven to be the best investment; better than even realty. And when such are the returns, there is no way that a hike in import duty is going to deter buyers. Only, it will now be channeled through unofficial routes. The custom officials at airports will have to work extra hard, especially at Chennai airport (assuming they are non-corrupt, only then will collection for Govt go up or else the custom officials will rejoice) . India imports around 800 tonnes of gold every year and Tamil Nadu alone accounts for one-fourth of these imports.

Govt might in fact lose more income; might earn lesser than what it is earning today on these duties. Many transactions will now get done without a bill; meaning many deals will not get reported at all or will get reported for half the value. But then, even today, when you walk into jewellery shops, many are willing to do a deal without a bill. This percentage will only go up. And why is the industry crying foul? They will as such promptly pass on the cost to the consumer, so where is their loss at all?

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. Or better still, why is the Govt not banning forward trade in gold to reduce volatility?

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.”

Remember, the run-up in gold prices is created by punters who do not have any other viable alternative investment to property and shares.