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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Why do Indians Love Gold and is it Safe?

Indians love gold because...because they are risk averse. (Of course, risk as per their perception...which, as pointed out later, could be wrong).

It is logical that if the global economy crashes, equity will perform badly. Therefore, given all the negative news, they don't want to take undue risk in equity. So they prefer to invest in the two tangible assets they think are "safe" - gold and property. History, however, shows that even gold and property are NOT safe.

Japan and US are the prime examples of how investment in property can be disastrous.

Look at history of gold for last 35-36 years. From 1975 to 1980 gold prices moved from USD 160 to USD 600 (that too mainly in 1980 from 300 to 600 due to Gulf War). But next year in 1981 the price dropped to USD 450. And then till 2005 it remained below USD 450. Thus for almost 25 years it gave nil/negative returns. Imagine, someone having invested in gold in 1980/1981! In the euphoria of last 5-6 years, people have forgotten this history. From 2005 onwards gold has appreciated from USD 450 to around USD 1800 (again mainly due to global financial crisis). Thus during this 35 years, average return is only around 6-7%. I consider Gold more as an insurance during bad times and not as an investment option for long term. If the economy bounces back, gold will crash...and crash very badly.

(Given this track record, I personally believe that it may not be prudent to commit too much money to gold. One can at best invest a small % (say 5%) of one's corpus in Gold and that too systematically.)

Indians love gold because...because in India the financial inclusion is very poor. Beyond the top 15-20 cities, there are practically no banks, no MFs, no insurance, nothing. So what can people do? Where can they invest their surplus cash? No option...but Gold. Also, gold acts a good collateral to get loan. Many small businesses like shops, tuition classes, beauty parlours, gyms, etc. have come up by getting loan against gold. No bank was willing to lend them money in the normal course of business.

Indians love gold because...because for shares and mutual funds there are many procedural hassles such as demat account, KYC norms (that keep changing repeatedly), broking account and other formalities to comply with...and for all practical purposes all these are useless.

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