Inside view of a jewellery shop in Connaught Place New Delhi, India. (Pradeep Gaur/Mint via GettyImages)
Snapshot
  • The act of hoarding, whether it is money or gold, depresses economic activity, and today gold is a major contributor to India’s trade deficit.

    The government’s economic reforms will perhaps lead to greater financial inclusion, and hopefully reduce the need to hoard gold.

Indians have been obsessed with gold since time immemorial. In Roman times, Pliny called India “the sink of world’s gold”. Charles Kindleberger in his little-known book Spenders and Hoarders: The World Distribution of Spanish American Silver, 1550-1750, talks about the Indian propensity to hoard gold. Most of the precious metals mined from Spanish Americas ended up in Asia (the hoarders) via Europe (the spenders), with the gold largely ending up in India and silver in China and Japan. The love of the yellow metal persists to this day. Although the mechanisms of obtaining gold has changed, the irrational love for gold has been a drag on our society through history.

The act of hoarding, whether it is money or gold, depresses economic activity, as demonstrated by Keynes in his paradox of thrift. Indeed, Europeans by spending all the precious metals from the Americas boosted economic activity and ultimately sparked the rise of modern capitalism whereas Asians by hoarding ended up falling behind.

In pre-modern times, Indians obtained gold by running persistent, large trade surpluses. Essentially, Indians produced much more than they consumed. My view is that the distribution of income was skewed in India relative to Rome in ancient times, which allowed the hoarding of gold. Poor people tend to have a high marginal propensity to consume whereas the extremely rich have a relatively low propensity. An analysis based on wages in the bureaucracy stated in the Arthashatra suggests that the Gini coefficient (a measure of inequality) was extraordinarily high even in Mauryan times. The extreme inequality meant that domestic demand was depressed relative to supply. The excess supply manifested as persistent trade surpluses. The gold obtained through these trade surpluses was hoarded. If income had been relatively more equally distributed, then the domestic demand would have been not as depressed relative to supply.

More important, the living standard of the average person would have been much higher had the elites not been obsessed with hoarding gold. These tendencies only worsened in mediaeval times under the Mughals, which was one of the most extractive regimes in history. Naturally, the gold and silver from Spanish Americas ended in the coffers of Indian (and other Asian) despots, while the masses lived in grinding poverty. (We do not have a great deal of information on average living standards in India before Mughal times. The reports of Faxian and Xuanzang suggest that prosperity was widespread. On the other hand, we have plenty of evidence during Mughal times that grinding poverty was the norm.)

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While in the past, India accumulated gold by running trade surpluses, today gold is a major contributor to India’s trade deficit. While individuals may view gold as an asset, for society as a whole, it is a dead investment, producing nothing. If instead of importing gold, India imports capital goods, then it will be increasing its productive capacity and making the society richer. Instead, a relatively poor country like India sits on 40 per cent of the world’s private holding of gold. What an utter tragedy.

Investing In Gold Does Not Make Sense Even For The Individual

I often hear gold bugs praise the sagacity of the average Indian for their hoarding of gold, apparently to escape the depredations of the state. Let us see how sagacious this gold-hoarding Indian is. Consider the returns on the Indian stock market and gold (both in dollar terms). Starting in 1998, the Indian stock market has beaten gold by more than two times, this despite the fact that 1998 was a low point for gold and marked the beginning of a historic bull run in the shiny metal.



S&P GSCI gold total return index S&P GSCI gold total return index

Taking a longer view, from 1979, the Sensex has outpaced gold by about eight times, and this does not even include dividends.



S&P GSCI gold total return index: Sensex in dollar terms S&P GSCI gold total return index: Sensex in dollar terms

India does not have good data on real estate prices, but my casual analysis suggests that it too has been gold handily in investment returns. Gold does better than fixed deposits. D Muthukrishnan has done extensive analysis comparing the returns on the Sensex, gold, and fixed deposits (FD) for Indian investors. However, investors in FD do not bear any risk at all, whereas gold prices are subject to significant volatility. Moreover, liquidating gold jewellery incurs a significant loss. In short, holding gold has not been a particularly wise decision by the Indian investor.

Gold Hoarding A Sign Of Failure As A Society

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In successful societies of the world, very few invest in gold and even the holding of gold jewellery is minimal relative to their wealth or income. Most people hold their wealth in the form of real estate or in financial assets. Successful societies are marked by a high degree of trust and cooperation and building a modern financialised economy requires cooperation at the highest level — in a national government. It is easy to distrust government and fall back on empty slogans, yet governments are a social construct too and their success/failure is a manifestation of our success/failure as a society.

The many steps taken by the Narendra Modi government to formalise the informal Indian economy and reduce graft in delivery of public welfare schemes will hopefully build trust in the system, lead to greater financial inclusion, and hopefully reduce the need to hoard gold. Time will tell.

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