The Most Authentic Guide on Personal Finance and Investments

Words of Wisdom : "The best way to teach your kids about taxes is by eating 30% of their ice cream." ~ Bill Murray

Gold vs Inflation Indexed Bonds

Govt. is not happy with Indians buying huge amount of gold...year after year. Naturally so! There is hardly any gold mined in India. Therefore, gold has to be imported to meet this consumer demand. This means dollars outflow. Moreover, due to global financial crisis, the gold prices have gone up sharply over the last 5-6 years. This has meant additional outflow of dollars for every gm of gold imported.

This higher demand for dollars makes the dollar expensive i.e. the rupee depreciates. This means higher costs involved in importing essential items like oil, coal and edible oils. This increases inflation. Higher inflation pushes people towards gold, which is seen as a hedge against inflation.

So this has become a vicious circle. 

To break this vicious circle, the Govt. has increased import duty on gold. It is has put some restrictions on lending against gold. And now, to wean people away from gold, Govt. is ready to launch inflation-indexed bonds (IIBs).

As discussed in an earlier post, prima facie IIBs appear to be a good product. (We shall get a clearer picture once the details are announced).

But will IIBs be attractive enough to charm people away from gold? I doubt. There are many reasons for the same.

a) Gold can be bought even in the smallest of the town and village, whereas IIBs will be accessible only in cities and big towns
b) Gold needs no paperwork
c) IIBs cannot be bought with "unaccounted" money
d) For many small businesses/traders gold is a convenient collateral
e) Gold is extremely liquid. IIBs, on the other hand, have a 10-year tenor and even if listed, easy liquidity looks unlikely. 

All in all, a good product, but may not achieve its intended objective.

You Learn A Lot By READING... And Even More By SHARING.

Share Button

Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

Subscribe via Email
Books by Sanjay Matai
[Click on the Pic for more info on my books.]
Powered by Blogger.

MUST READ Posts - Jul'18

a. 4 Easy Tricks That Make You Rich
How to save lots of money
Four financial aces in your hand, that you probably missed...


b. I Hate Losing Money. So I Invest In Stocks.
Hate Losing Money in Stocks
Oops! That sounds quite contradictory.


c. Why Mutual Funds Won't Survive On The Planet Mars
No Mutual Funds on Mars
Mutual Funds would be a totally ALIEN concept on planet Mars.