Cypriot lesson: Gold is like a Swiss account for you and me

Thus far this year, gold has lost 5 percent of its value in rupee terms. Prices of 22-carat gold in Mumbai are quoting around Rs 27,000 per 10 gm (around Rs 29,500 for 24-carat), and could fall further.

Why is this happening? Is it time to abandon gold as an investment avenue?

I think not. While no one in his right mind will advocate gold as the only form of investment, this writer believes that it has to form a good 5-10 percent component of one’s investment portfolio - largely as a form of inflation hedge in a climate of financial repression and the flood of printed money which is debasing currency values.

The Cyprus bailout is a wake-up call. One fine day, the government just pounced on depositors holding more than 100,000 in their accounts (below 100,000 they were insured). Nearly 4.2 billion in such deposits in Laiki Bank, which is to be closed down, will be shifted to a “bad bank” - meaning they may not receive any of their money. Deposits of under 100,000 will be shifted to the Bank of Cyprus, All other debtors of Laiki may get zilch when the bank is fully wound up.

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If governments can just seize your money, it makes eminent personal sense to keep some of it in forms that can’t be easily confiscated. Gold is one option.

However, there is a more subversive reason for wanting to buy gold - it is essentially a vote of no-confidence in government. Gold is the relatively poor man’s Swiss account.

[caption id=“attachment_676909” align=“alignleft” width=“380”]  Don’t let go of that gold just yet. Reuters[/caption]

When it comes to Tata, Birla, Ambani or any high net worth individual (HNIs), if India is not a good place to keep your money for whatever reason, you can go abroad. Your companies can invest in other countries formally. But HNIs can salt their money away clandestinely in the Cayman Islands or the Bahamas. If you are more careless, you can even try the Swiss banks.

The big boys of India Inc have said they are not interested in investing in India - in almost as many words.

Earlier this month, Kumar Mangalam Birla, had this to say : “Country risk for India just now is pretty elevated and chances are that for deployment of capital you would look to see if there is an asset overseas rather than in India.”

“We are in 36 countries around the world. We haven’t seen such uncertainty and lack of transparency in policy anywhere,” he told Bloomberg TV in an interview.

Earlier, Cipla chief Yusuf Hamied, a pharma industry pioneer, began waving goodbye to India, and said so.

“The tax policies and lack of basic infrastructure are huge problems in India. Because of lack of prudent tax and stable policies, all big Indian companies are going abroad. The time has now come for us to say goodbye to India,” he told Business Standard.

Before him Rata Tata told Financial Times that he was frustrated with the investment climate in India.

While Tata, Birla and Hamied were essentially talking about their corporate investments, the logic applies to individual savings too. HNIs can take their money elsewhere, ordinary mortals like us can’t. This is why we vote our no-trust by buying gold. It’s our Swiss bank account, our Cayman subsidiary that the government can’t probably touch.

This is why the government is trying its damnedest to prevent us from buying gold by raising import duties. It is calling us anti-national for trying to protect our savings, by ring-fencing our money from financial repression. Even while inflation is in double-digits, the government is busy cutting interest rates, and making the value of our money even lesser.

The current fall in the value of gold should be good news for people who have cash to spare.

Consider gold’s performance over the last eight or nine years. It has given an annual average return of 16.9 percent, and only this year has the return actually been negative - at minus 5 percent so far in rupee terms.

In most calendar years since 2005 (see the chart here), returns on gold have ranged from 10 percent to 31 percent. This is not to say you won’t make losses this year or even next year, but the fall helps us cock a snook at fiscal repression in the long run.

It is not wise to put all your money in assets denominated in rupee over the long run.