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Is gold losing its age-old status as a store of value? Sanjeev Prasad, head of Kotak Institutional Equities, believes so. He points to the less than satisfactory return it has shown as an investment over the past five years.
India, he says, imported and 'consumed' over $300 billion worth of gold between 2007-08 and 2016-17, financing the resultant trade deficit through large capital flows. Some of which has gone into increased foreign ownership of Indian companies, now at almost 25 per cent of the top-200 stocks. Foreign Portfolio Investors bought $124 bn of Indian equity over FY08-17, the value of their holding going to $368 bn (BSE-200 Index basis) as of end-March 2017, versus $132 bn at end-March 2007. Gold prices, he says, rose three-fold in rupee terms over this period.
He says the bulk of the FPI investment and of gold import happened during years of high inflation. With inflation now coming under control, he says, and the Reserve Bank targeting lower inflation than in the past, this is likely to keep gold import low. And, gold's status as a store of value or hedge against inflation will fade.
He notes that the price of standard gold was Rs 28,835 per 10 grams in May 2012 and is presently around the same level. In three of the past five years, the price has fallen on a yearly basis. So, gold investment has also been falling.
'The policy on inflation management has achieved remarkable success," says Prasad, "which should reduce gold's function as a store of value. And, India's financial inclusion programme has attained undeniable success. This should reduce the compulsion of citizens to own gold, as they have access to bank accounts."
A Mumbai-based scrap gold dealer says it is increasingly difficult to buy gold from consumers and pay immediate cash. "Neither do they have bills to show purchases and nor do we have that kind of cash. The (coming) goods and services tax will make it more difficult for us to deal in unaccounted old gold."
Buying physical gold for investment will attract a three per cent GST. While sovereign gold bonds will not attract GST and give an annual 2.5 per cent return. Sanjeev Agarwal, who heads business chamber Ficci's bullion committee, says "gold investment will stabilise at lower levels".
Surendra Mehta, secretary, Indian Bullion and Jewellers Association, disagrees. "Gold is not losing its shine," he says. "Post demonetisation, business has not been good due to its effect. But, the price is still favouring people to buy gold. Within 45 days of GST taking effect, when the festival season starts, we feel it will be be good for the industry."