Toronto Globe and Mail features GATA Chairman Bill Murphy


By Gautam Chikermane
Indian Express, Mumbai
Friday, December 16, 2005

I plead guilty.

For denouncing gold as an asset class.

For castigating millions of Indian investors who invested their
savings in it.

For being insensitive to the ground realities of this "obsession."

For the dozens of times I've publicly condemned it during the past

And, most importantly, for not being able to empathise with the
large mass of India that lives 50 km beyond metros, cities, and
large towns.

But the reason is not because of price movements that can prove and
in this case have proved analysts who pray at the altar of financial
assets wrong.

True, over the past 12 months, gold has risen by 25 percent,
breaching the 8,000-rupee mark, to close at Rs 7,540 yesterday.

True, it is only the past three years has seen the beginning of this
stratospheric journey.

True, between July 1991 and March 2002, the price had been
fluctuating in the Rs 4,000 to 5,000 band -- except, of course, the
small 14-month period ending exactly nine years ago, in December
1996. Also true, this spurt in gold prices has broken all previous
trends and converted one of the most striking and most repeated past
truth into a present myth.

Truth was, gold has a low or negative correlation with most other
asset classes like stocks and is inversely proportional to the US
dollar. The past 12 months have seen the Sensex rise 40 percent to
close at 9,170 yesterday. The rise over the past three years has
been 174 percent, or about 40 percent per annum. Gold over the same
period has risen by almost 40 percent or 11.7 per cent per annum.
The Sensex has grown by 18.5 percent per annum over the past five
years, gold by 11.6 per cent.

One probable explanation is that gold is being driven by a global
rethink on asset allocation, while Indian equities are experiencing
a country re-rating. The dollar too has been rising -- against both
the euro and the yen.

Let's leave global trends alone and move toward a more mundane and
touchable reality here.

The villager in Nu, about 100 km from Delhi, is unconcerned with
anything beyond his crop and capital. As and when he generates a
surplus, if it is large enough, he buys land; if it is smaller,

Now there are more than 150,000 post offices, four out of every five
catering exclusively to rural areas, according to the Department of
Posts. They are supposed to offer small saving schemes like PPF to
small savers. As we all know, these are instruments that offer
artificially high returns that are guaranteed by the government.

And still farmers, farm workers, petty traders, and the whole
village economy buy gold, not PPF.

The reason? Access. Try opening a PPF account there and you face a
process, a bureaucracy, a system that forces you to hit gold. Try
opening a bank account with a public sector bank in the closest town
and there are no cheque books. Simple matters that we take for
granted in cities turn into full-fledged projects. Are these
instruments, these banks (for now, we're not even talking about
mutual funds) the exclusive preserve of the educated, wealthy, urban

Surely there is a logic why people buy small amounts of gold for
their daughters in these villages -- gold, for them, is a means of
last resort. But here lies the surprise: Most of rural India does
not, as analysts imagine, buy gold jewellery but gold coins. Gold
jewellery, says an analyst, is bought by urban investors. The rural
population doesn't buy jewellery because there is a strong emotional
connection with it. A mundane coin is a mundane coin. Sell one
today, buy one tomorrow -- no guilt, no sentiment.

The three-part logic is crystal clear.

One, the front-end of financial intermediaries doesn't offer trust
or convenience.

Two, the processes are so cumbersome that corruption is inevitable.
In the heart of Delhi I have seen an old woman grovel before a post
office clerk and finally pay a bribe to get her own money back even
as I was told to deploy my small investment through an agent, so I
could get part of his commission back.

Three, higher returns, therefore, don't matter.

So it's gold. With all its accompanying statistics -- Indian public
holding about 7-8 percent (more than 15,000 tonnes) of global
stocks, buying Rs 40,000 crore (19 percent of global consumption) of
gold every year and so on. The recent change in guidelines that will
pave the way for mutual funds to invest in gold is thrice removed
from traditional gold buyers -- lack of access, trust,
understanding. For this to change, lots more needs to change.

Guilty, as charged.


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