Expertspeak: The yellow metal will lose its glitter

The idea to buy gold is feudal in origin. It’s from times when money was commodity-backed and banking and financial system hadn’t developed. In India, gold is a paradox. The world digs it out to sell it, we buy it and effectively bury it again in some locker. Indians have purchased around 25-35,000 tonnes of gold till date.

This amounts to $1 trillion-plus in value. All this amount is locked away, unproductive and unutilised. Even a fraction of this, if invested in a financial instrument, would majorly benefit both the investor and the country. The lacklustre performance of gold over the past few years, and strong performance of financial assets during the same period is, however, reining in investors’ fascination for gold. Increasingly, household savings are moving away from physical savings towards financial assets.

If the trend of gold’s underperformance continues to overlap with the outperformance of financial assets, the hoarding habit may just take a back seat. Even if gold buying continues, the new gold monetisation schemes are better advised then the traditional hoarding of gold. Of the two schemes, the gold monetisation scheme asks the gold hoarders to deposit the gold with the government and earn interest on the deposit. Thus a gold buyer earns income without the stress of security for the asset and can always take back the gold when needed. The other scheme, the gold bond scheme, encourages gold buyers to purchase gold bond instead of buying fresh gold.

This way the gold buyer earns an interest on the investment and can realise back the bond at the value of gold prevalent at the time of redemption. In both cases, the gold buyer can benefit from the interest rate while avoiding the hassle of the purchase, fair valuation, security and sale. The benefits of these schemes need to be communicated well. We stand at the cusp of a financial change.

The success of these schemes will majorly impact our gross financial future. The change in the investment habit of the Indian investor can bring down the cost of capital and make industry more competitive. And, for once, we may become a net manufactured goods’ exporter rather from being a net capital exporter.