Rethinking gold’s role in the economy

Trivia | Market Commentary

Most modern economists today do not consider gold as anything but a commodity; since the invention of paper money, and technological advances that make blips on your computer equivalent to money (when you go online and pay your bills, or engage in online banking), gold was the one store of value that nations treated as money.

In 1991, when the Indian government had enough foreign exchange reserves to cover just a few weeks of imports – primarily oil, without which the economy could grind to a halt – we had to pledge a part of our gold reserves to raise enough money that would restore confidence amongst global bankers that we would be able to meet our trade payment obligations.

History has shown that only gold retains its value during wars and upheavals, changes of empires and Governments, and during times of crisis. True, officially gold is held to be of only industrial value; but it is the oldest and most respected currency in the world and the only one respected when national paper monies lose value.

In India, private holdings of gold – by families and individuals mainly – amount to a shade over 10 per cent of all the gold ever mined, according to several assessments and studies. The number is roughly 24,000 metric tonnes in the form of jewellery, coins and bars. The Government of India, at times, has sought to monetise at least a part of the private holdings, but without too much success.

There is no doubt that the conversion of savings held as gold into investment capital can make a huge difference to India’s growth prospects. Policymakers in India worry about the impact of unchecked gold imports, and the impact of the country’s current account and balance of trade, especially in these difficult global economic conditions. However, thinking of gold as just another commodity is not the answer either.

Despite everything, there is a difference in attitudes towards gold in the Western world and in the East. When gold is referred to as money, especially in the United States, people demonstrate incredulity and even scorn. In the East, however, nations and individuals accumulate gold as a store of wealth; in some countries like India, it is revered.

Behavioural economics identifies biases and how they impact economic behaviour. One such bias is the safe value bias, which is specific to gold; the yellow metal provides the highest security in troubled periods. The bias represents investors judgment against uncertainty.

Given the intricate and complex relation that Indians have towards gold that spans economics, culture and tradition – and that influences their behaviour – perhaps it makes sense to reimagine the role that gold can play in our economy.

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It is the purity of a precious metal that is measured in 1,000 parts of an alloy. For example, gold bar with fineness of 0.995 means that it has 995 parts of gold and 5 parts of another metal.

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