Many of you might find this article contradictory and some even ridiculous, especially by the time when RBI has bought 200 tons of Gold form IMF at peak valuations. But we will just speak about the plain facts and the opportunities that are hidden.If i can bet my life in predicting something that you own, i would bet on Gold rather than any stocks or cars or bonds or even homes. Such is the passion and addiction that we Indians have on this shining yellow metal. A French traveler to the country quoted – “It should not escape notice that gold and silver, after circulating in every other quarter of the globe, come at length to be absorbed in Hindostan.”
Another one from early 1700s quoted – “Every nation, that ever traded to the Indies, has constantly carried bullion, and brought merchandises in return. … commerce of the Romans to the Indies was very considerable … this commerce was carried on entirely with bullion … bullion was always carried to the Indies, and never any brought from thence.”
The reasons for this addiction are many. It comes from cultural, traditional and religious sources. The very reason that the country has witnessed rise and fall of many kingdoms and invasions also support the fact that there was merit for the subjects to hold their wealth in Gold which can be easily hidden. Also, gold coins issued by one king was valid with the other, provided it was of good quality.
India’s private Gold holdings – Coming to the present, we Indians hold around 20,000 tons of Gold. The private holdings of 20,000 tons of gold in our country dwarfs the Official reserves of RBI (550 tons) and even that of US (8000 tons). The country is home to 14% of Gold that were ever mined in History. The total value of these private holdings in our homes can be pegged at more than 750 billion US dollars.
Unproductive – So where are these many tons of Gold hiding? They are hidden in the bangles or the chains or other ornaments, our families have. They are present in the form of Jewelry and ornaments that either lie idle in our homes or in locked in the vaults with the banks. In either case, they are “unproductive”.
Imparting Liquidity – Consider this – The country needs to invest around 500 billion USD in its infrastructure before the financial year ending March 2012 to maintain high growth rates of 9% or 10%. 100 billion dollars will be sufficient to ensure safe drinking water to all the citizens and another 50 billion dollars go a long way in improving sanitation facilities and health facilities. Another 50 billion dollars may be needed to provide reasonable shelter to the all the needy.
Now, tell me, don’t you think that in a country like India, which has the most poor in the world, Gold which locks down down 750 billion USD of value, a curse ? What wonders can this value do, if there is a way where we can impart liquidity to it?
Failure of RBI and GOI – The RBI and GOI has tried its best over the last five decades to impart liquidity to these private holdings with out any kind of success. The Gold control order that the RBI came up with during the Chinese war to discourage Gold buying was a complete disaster. Various Gold mobilization schemes and Gold bonds that the RBI introduced where interest will be paid on Gold deposits was also a thorough failure.
In its 1999-2000 budget, the Indian government announced a new initiative to try and tap the hoard of private gold held in India, this time by permitting commercial banks to take gold deposits of bars, coins or jewelry against payment of interest. Each bank can set their own interest-rate levels, with deposit periods ranging between three and seven years. The State Bank of India was the first to accept deposits, but to date the amount of gold collected under this scheme is just 10 tons.
Seeing these incidents and facts that have failed in imparting liquidity to the private gold holdings, it would be a great achievement if somebody can come up with a framework which can tap into these holdings and impart liquidity. It would be hugely productive, if at least the liquidity is imparted on a short term manner, which could translate into economic activity.
Few Winners – At this juncture, i should also acknowledge that there are businesses and entities which have tasted success in doing what the RBI and GOI could not do for five decades. These companies will go down as major achievers and have a promising future.
During 2003-2008, so great was the fascination with the construction, infrastructure and real estate that any company even remotely associated with this theme saw its value skyrocketing. I say this because many companies at that time were not into construction or any related activity, but still their value enhanced. This is because they had good lank banks sitting on their balance sheets.
I am talking about all this because while searching through various stocks, I came across a company which is currently quoting at a market cap of Rs 163 crore, while the operating income does not justify such a valuation.
However, as I mentioned it has good amount of cash and Land bank with it.
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