The golden elephant in the room

Tuesday, November 03, 2020

Business India Magazine 

 

As Covid-19 continues to spread with devastating economic consequences, something quite positive for the people of India has gone unnoticed. It’s well-known that the people of India have, over the ages, accumulated the largest hoard of private gold anywhere in the world. Estimated at about 25,000 tonnes, this gold is now worth about $1.6 trillion (at $2,000 per ounce). Before the pandemic, the same gold was worth only about $1.1 trillion. 

In other words, India’s households, which have seen their economic status battered by a shrivelling economy, have also collectively added about $500 billion to their wealth precisely at a time when it was most needed. The economic fallout from the pandemic has in effect generated a sizable wealth effect for our households. For a change, it is likely more pronounced for rural India, where a larger share of this gold resides. 

Economists have long discouraged investment in gold, arguing that it fetches no yield and, therefore, made no sense. That’s true but it misses the point that gold is not expected to yield anything. It is considered equivalent to money, and money has no yield. Investing in gold is simply a way of preserving your wealth, particularly in this age of fiat currency, where governments can print money at will.  

Today, the faith Indians have always had in gold has been vindicated – and not for the first time either. What’s more, a cursory reading of the tea leaves suggests conditions are ripe for gold to hold on to its gains, at least in the short to medium term. Why this is more likely requires a walk back in time to 2008. 

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