Sunday, August 4, 2013

Is gold the problem or the solution

For the past 6 months various “people who matter” have been complaining about our love for the yellow metal and how it has caused various problems that we currently face – our Finance Minister even appealed to his fellow countrymen to consume less gold so that the current problems of the country can be tackled. I hope soon he will also appeal to his fellow cabinet ministers to be less corrupt and work for the benefit of the nation – even better – he should appeal to them to take a permanent retirement from all forms of “public (self) service”
Our obsession with this metal is legendary.  India was called “sone ki chidiya” and the gold attracted many mercenaries from across the world to plunder this wealth – some of them stayed back to become rulers of this great nation.  We now consume about 25% of the world’s production of gold as against 10% a decade back – a level that is clearly unsustainable.
By some estimates we hold gold worth 2 trillion dollars. To put this number in perspective, our annual GDP (Gross Domestic Product – the total economic activity of the country is about the same number). Although i am not a big votary of gold as a asset class (more on that some other day) it is indeed a lot of wealth that is held by the citizens of this country. 
The problem is not the domestic consumption of gold – the problem is that we don’t produce any of it – almost everything is imported and paid for in dollars. Instead of trying to get to stop consuming it, maybe we need to think how to reduce the import of the same.  Gold imports magnified itself in a problem as the price of gold increased about 5X in the last decade and our demand of gold doubled during the same period.
Lets look at some possibilities  -
1.       Improve the domestic recycling of gold – We are not satisfied holding so much of gold - we also keep adding by importing a lot of it - almost 850 tonnes of it every year. Incentivising people to recycle some of this gold – gold FD’s/gold bonds is an option that needs exploring.
2.       Get it out of our religious institutions - The Tirupati, Vaishno Devi and Shirdi temples hold a large quantity of gold that should be sold – it will give these temples cash which can be put into other financial instruments like FD’s and will spare the headache of safety of this metal while it is in the vaults of the temple. The Tirupati temple holds about 200 tonnes of gold and deposits 1 tonne every year with SBI in its gold deposit scheme. All the gold held by the other religious institutions of the country will easily be 4 times of what Tirupati temple holds – about 800 tonnes which would be enough for us not to import gold for a year. These nos are estimates but there is little reason to doubt these.
3.       Encourage the electronic goods recycling in the country – some large global players are able to produce 10 tonnes of it every year by this method. The laws such be made stringent so that the pollution levels do not increase due to this but this is a good way to create a steady supply of gold into the country. With the consumption of electronic goods ever increasing in the world, the supply of goods to be recycled should not be a problem.
4.       Re open the Kolar gold mines – the mines in Karnataka have been closed since 1992 and can produce about 20 tonnes of the metal every year.
5.       Prevent the flow of black money into gold - Enforce the KYC at jewellers more strictly – it should not be possible to buy gold without PAN or an Aadhar card.
6.       Enforce the wealth tax on gold holdings more rigorously – the gold deposited with the banks under the gold deposit scheme should not be levied this tax hence encouraging the citizens to use this scheme in a better way.
Only the combination of the short term measures (1, 2, 5 & 6) and long term measures (3 & 4) will ensure that we come out of the current difficult situation and do not go back into it the next time the prices of gold start moving up sharply again.
Maybe it is both a problem and solution – it is just a matter of perspective.
As always – thoughts and comments are welcome.
Next week – 10 questions that need answers


  1. Cool. So nicely penned down that even a non commercial dumbo like me could understand. Thanks. Only point that seemed out of context to me was 3rd point..about electronics. Why was it mentioned here? How is it related to the gold affair. Or was it being referred to 'metal recycle' as a whole? On a lighter note, promote 'bhaag ke shaadi' save gold !

  2. Nice blog Kuldeep...

    We Indians are very much fascinated by two investment avenues 1. Gold 2. Real Estate.

    I guess one more possible solution to this problem can be educating people about other investment avenues like Equity, ETFs, Mutual Fund Schemes (including Debt).

    I think, regulator & Govt have a lot of scope to resolve this problem, by making various other investment avenues attractive.

    Mahavir Kaswa

    1. Thanks Mahavir.
      Alternates to gold should be developed and will take a lot of patience. Also it would be very difficult to wean off Indians in a big way from gold, after all, we have been obsessed with it for many centuries!!

  3. Yes dear, point 3 is about recycling. The use of electronic goods is increasing exponentially and recycling the same to extract precious metals can be a good opportunity.