I plead guilty. For denouncing gold as an asset class. For castigating millions of Indian investors who invested their savings in it. For being insensitive to the ground realities of this ‘obsession’. For the dozens of times I’ve publicly condemned it during the past decade. And, most importantly, for not being able to empathise with the large mass of India that lives 50 km beyond metros, cities and large towns. But the reason is not because of price movements that can, and in this case have, proved analysts who pray at the alter of financial assets wrong. True, over the past 12 months, gold has risen by 25 per cent, breaching the Rs 8,000 mark, to close at Rs 7,540 yesterday. True, it is only the past three years has seen the beginning of this stratospheric journey. True, between July 1991 and March 2002, the price had been fluctuating in the Rs 4,000 to 5,000 band—except, of course, the small 14-month period ending exactly nine years ago, in December 1996. Also true, this spurt in gold prices has broken all previous trends and converted one of the most striking and most repeated past truth into a present myth. Truth was, gold has a low or negative correlation with most other asset classes like stocks and is inversely proportional to the US dollar. The past 12 months have seen the Sensex rise 40 per cent to close at 9,170 yesterday. The rise over the past three years has been 174 per cent, or about 40 per cent per annum—gold, over the same period has risen by almost 40 per cent or 11.7 per cent per annum. The Sensex has grown by 18.5 per cent per annum over the past five years, gold by 11.6 per cent. One probable explanation is that gold is being driven by a global rethink on asset allocation, while Indian equities are experiencing a country re-rating. The dollar, too, has been rising—both, against the Euro as well as the Yen. Let’s leave global trends alone and move towards a more mundane and touchable reality here. The villager in Nu, about 100 km off Delhi, is unconcerned with anything beyond his crop and capital. As and when he generates a surplus, if it is large enough, he buys land; if it is smaller, gold. Now, there are more than 150,000 post offices, four out of every five catering exclusively to rural areas, according to Department of Posts. They are supposed to offer small saving schemes like PPF to small savers. As we all know, these are instruments that offer artificially high returns that are guaranteed by the government. And still, farmers, farm workers, petty traders, the whole village economy buys gold, not PPF. The reason? Access. Try opening a PPF account there and you face a process, a bureaucracy, a system that forces you to hit gold. Try opening a bank account with a public sector bank in the closest town and there are no cheque books. Simple matters that we take for granted in cities turn into full-fledged projects. Are these instruments, these banks (for now, we’re not even talking about mutual funds) the exclusive preserve of the educated, wealthy, urban citizens? Surely, there is a logic why people buy small amounts of gold for their daughters in these villages—gold, for them, is a means of last resort. But here lies the surprise: most of rural India does not, as analysts imagine, buy gold jewellery, but gold coins. Gold jewellery, says an analyst, is bought by urban investors. The rural population doesn’t buy jewellery because there is a strong emotional connect with it. A mundane coin is a mundane coin. Sell one today, buy one tomorrow—no guilt, no sentiment. The three-part logic is crystal clear. One, the front-end of financial intermediaries doesn’t offer trust or convenience. Two, the processes are so cumbersome that corruption is inevitable—in the heart of Delhi, I have personally seen an old woman grovel before a post office clerk and finally pay a bribe to get her own money back even as I was told to deploy my small investment through an agent, so I could get part of his commission back. Three, higher returns, therefore, don’t matter. It’s gold, therefore. With all its accompanying statistics—Indian public holding about 7-8 per cent (more than 15,000 tonnes) of global stocks, buying Rs 40,000 crore (19 per cent of global consumption) of gold every year and so on. The recent change in guidelines that will pave the way for mutual funds to invest in gold is thrice removed from traditional gold buyers—lack of access, trust, understanding. For this to change, lots more needs to change. Guilty, as charged.
