Gold as an investment: a change in behaviour ?
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Long queues outside jewellery shops, now to sell: Business Line (Feb 20, 2009)
I was pleasantly surprised to read this news ... "Indians selling jewellery?" - That is probably the indication that Gold is just way too too too overvalued. A colleague of mine, whom I respect a lot, said "Gold is a one-way street in India. People always keep buying gold. Gold is never sold from an Indian's household". I also shared his opinion till now.
Taking one step backward, this is probably why economists (who believe in market forces) ask governments to let the market decide for itself. What has just happened? Gold became way too costly - People took a call that they could actually sell at this high price and buy it back at a much lower price - this resulted in an entire shift in consumer behaviour. If this becomes more prevalent, the price of gold will automatically come down to a level at which people stop selling and start buying ... market corrects itself (I hear you saying 'If only it could be so easy !!')
Some issues:
There is no 'market' to sell our gold coin / jewellery. If we take a gold coin weighing 1 sovereign to a shop like GRT, they do not give us money based on today's gold prices. They may only take it as an exchange for buying jewellery weighing 1 sovereign. In other words - gold can be exchanged only for gold - gold cannot be exchanged for cash. That could be a reason why selling jewellery is not more prevalent than it is now.
On the other hand, if all you want is to speculate on gold prices, there are gold ETFs and gold MFs. They eliminate the 'carry cost' (keeping the gold coin safely, paying Rs.1000/- per year to a bank for using their deposit locker, hiring an auto to and from the jewellery shop instead of taking a bus. Chennai readers will probably prefer dealing with mafia than negotiating with auto drivers).
Of course, 'selling family silver' is still a taboo that is frowned upon. It is probably going to take several decades before Indians look at gold as a pure investment asset.
As my colleague said 'Try telling the lady to sell her gold necklace as the price of gold is at its highest ... Try telling the lady that it will be bought back when the sovereign costs 5K lesser' Now we know why gold never looses its shine.
An interesting datapoint - An investment option offered by GRT. A chit fund like offer: Pay 1000 bucks for 15 months. Take home jewels worth 16,400 at the end of 16 months. It works out to an yearly interest rate of 14.1%. Contrast this with SBI and ICICI's 1 year deposit rate at 8.5% and 8.25% respectively. That is a spread of more than 5.6% over a (notionally) risk free FD return. A question that occurs to me ... Is it the middlemen who are taking away extraordinarily high margins ...
Long queues outside jewellery shops, now to sell: Business Line (Feb 20, 2009)
I was pleasantly surprised to read this news ... "Indians selling jewellery?" - That is probably the indication that Gold is just way too too too overvalued. A colleague of mine, whom I respect a lot, said "Gold is a one-way street in India. People always keep buying gold. Gold is never sold from an Indian's household". I also shared his opinion till now.
Taking one step backward, this is probably why economists (who believe in market forces) ask governments to let the market decide for itself. What has just happened? Gold became way too costly - People took a call that they could actually sell at this high price and buy it back at a much lower price - this resulted in an entire shift in consumer behaviour. If this becomes more prevalent, the price of gold will automatically come down to a level at which people stop selling and start buying ... market corrects itself (I hear you saying 'If only it could be so easy !!')
Some issues:
There is no 'market' to sell our gold coin / jewellery. If we take a gold coin weighing 1 sovereign to a shop like GRT, they do not give us money based on today's gold prices. They may only take it as an exchange for buying jewellery weighing 1 sovereign. In other words - gold can be exchanged only for gold - gold cannot be exchanged for cash. That could be a reason why selling jewellery is not more prevalent than it is now.
On the other hand, if all you want is to speculate on gold prices, there are gold ETFs and gold MFs. They eliminate the 'carry cost' (keeping the gold coin safely, paying Rs.1000/- per year to a bank for using their deposit locker, hiring an auto to and from the jewellery shop instead of taking a bus. Chennai readers will probably prefer dealing with mafia than negotiating with auto drivers).
Of course, 'selling family silver' is still a taboo that is frowned upon. It is probably going to take several decades before Indians look at gold as a pure investment asset.
As my colleague said 'Try telling the lady to sell her gold necklace as the price of gold is at its highest ... Try telling the lady that it will be bought back when the sovereign costs 5K lesser' Now we know why gold never looses its shine.
An interesting datapoint - An investment option offered by GRT. A chit fund like offer: Pay 1000 bucks for 15 months. Take home jewels worth 16,400 at the end of 16 months. It works out to an yearly interest rate of 14.1%. Contrast this with SBI and ICICI's 1 year deposit rate at 8.5% and 8.25% respectively. That is a spread of more than 5.6% over a (notionally) risk free FD return. A question that occurs to me ... Is it the middlemen who are taking away extraordinarily high margins ...
posted by Naveenan Ramachandran | Saturday, February 21, 2009
2 Comments:
One day, when countries are evaluated only by the gold it owns, we will praise our women.
btw, Gold is indeed an investment - the ultimate one at that. You decide to cash it when the husband, parents, siblings and the whole world closes the doors.. so, we ladies probably don't sell our gold necklaces because we don't trust you gentlemen?!
Wow Wow ... It was just an objective commentary on consumer behaviour when it comes to the yellow metal ... Just trying to explore reasons as to why it is only bought and not sold ... Have absolutely nothing against women ;-D
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