Sunday, 26 February 2012

The Enigma Named Gold

Bubbles are no strangers for financial markets; they only burst after the last man had joined the party. The time for gold has come.

Gold and Oil present the most complex challenge for world as to what their fair value is. Doesnt matter if one of them is immensely useful and the other utterly useless as a matter; both sit comfortably in any smart fund manager's portfolio in fairly long position.This post will talk about gold and not oil, because that yellow metal is the biggest enigma to me. The only value in gold is that it has been considered valuable since generations before generations. A perception of value, not utility not productivity not cash flows, is the value of gold. Gold has been there since donkey's years, it is the veteran, the senior most investment class. Gold has been the currency of kings and gods. Buy gold and enjoy the sublime.


Gold is flawed investment class from both individual and societal perspective. Must admit though that it is fantastic as a jewelary item. Gold, unlike bond, stocks and real estate do not generate cash flows in INR or USD or any other currency. Investors who buy gold generally dont care about those lost cash flows which would anyways be worthless due to inflationary policies of governments and money printing by central banks. Therefore as a humble protest or hedge against incompetent economic system and policy makers, investors world over buy gold and have been served well so far. Little do they realize that to safeguard their priceless physical gold they are just as much dependent on the same incompetent governments and political system, thus rendering the hedge useless. And honestly who wants to hold the physical cash or gold in his lockers while the whole of ocean11 is out loose. I seriously believe that a treasure chest of gold may bring as much anxiety to the holder as it could bring prosperity.

From the collective standpoint, gold is a form of saving that destructs economic activity and increases societal inequality. Simply put, the $10bn amount that indians invested in gold this year could have been deposited with banks and lent onwards to productive parts of economy, or could have been invested in bonds that created infrastructure and jobs. Add up all the investments of past, and you'd know how handsomely gold has contributed to the pathetic infrastructure and the laggard economic system of country. Gold is an evil for economy like ours, and should be either banned like it was in US till 70s or taxed heavily at purchase i.e. upwards of 50%. High taxes are justified because an investment in gold will never generate any income and hence would hardly pay any taxes in future.

While gold is doing a great job of adorning our women, it has no business in strangulating the productive needs of our economy and hence it is the need of the hour to free our country from the clutches of enigmatic yellow metal.

Defence rests.

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