Making gold work
Why is our FM advising us not to buy gold? Why have prices zoomed so dramatically? Is buying jewellery the only way to invest in the asset? Here's the first of two articles that unravel the mystery. Madhusheel Arora writes
Gold trade always draws comment, as the commodity is considered a parallel currency. A traditional, trust -driven enterprise, price discovery of gold is based on notional supply and demand (something called futures) as the world's largest banks, mining houses and market makers agree on a price at which a majority of their orders to buy or sell can be executed most fairly.
The price is actually determined to meet the future gold demand today, and thus changes daily.
Gold is hoarded, so it makes sense to price it like this or there will be no business at all, as shelves would empty in a jiffy. Of the $40 billion (Rs 2.4 lakh crore) turnover, only 10% of it is organised retail.
The tricity's over Rs 100-crore gold retail market has seen the entry of Kerala-based Kalyan Jewellers with a store opening on August 25. Value for money, variety in bridal jewellery and pricing, competitive making charges, brand recognition and purity are some frills jewellers advertise as their specialties.
Kalyan has hedged itself on purity, though the proof of the pudding will lie in the eating. It also plans to encourage purchase through the ubiquitous 'kitty' scheme with the store contributing a portion to a regular fixed term investment to push sales.
Gold jewellery is a sales-based show with margins at 6-10%. It is cash flow that does the trick. "Gold really started climbing in December-January 2010-11, when it touched Rs 22,800 per 10 gm.
Near this period, we had a lot of old gold come into circulation as people wanted to buy assets like a house or land. After that, the boom started with everybody chasing gold as the world economy weakened," says Vinod Talwar, a prominent gold businessman and chairman of Jewellers' Association, Chandigarh, one of the two such associations in the tricity. None of the two associations is worried about Kalyan's entry.
Tricity residents are savers, with no real outlet to spend our money on. Government diktats notwithstanding, the penchant for the good and flashy things in life overrides all else here and what can top gold jewellery, especially for women?
I'm of the opinion that gold might not give you immediate cash flow or returns, but it acts as an investment and also as insurance. A major criticism of buying gold is that it blocks money from circulating in other assets. This is true to an extent, but when the investor is ready can the government override his free will, as has been the case with the very recent hike (s) in import duty?
When faced with such a situation in case of currency as is now, governments in developing nations usually take the easy way out of printing more money, instead of forcing people to work their way out of a crisis. However, the government mandarins have, for now, to tackle the same problem put gold in the speculative investment category, when it is a primary asset for a majority of the retail customers, even more than a house. Something is amiss.
The government should focus its energies on increasing the productivity of other assets rather than targeting the trade, say traders. And you cannot deny their logic.