Why Warren Buffet and Indian Govt dont like Gold???

Every time a finance minister rises in Parliament to present annual Indian Budget, the investors in both the GOLD and CIGARETTES wait with bated breath. Reason, as far back as memory goes, every budget India has raised duties on both of them. While we understand the case of Cigarettes ( it kills, right?) , but what is this almost hate-hate relationship of Indian Govt. with GOLD!!!  Haven’t we Indians loved gold since centuries and isn’t gold the ultimate store of wealth? Then why?

Warren buffet doesnt like Gold!!!

World’s most legnedary investor doesnt like to invest in gold. Counter intutive, right ….after all, in last 20 years alone Gold has risen almost 30 times!!!

Gold is considered an unproductive assets- unlike other commodities like copper, zinc or even silver- gold doesnt produce anything.

Gold is considered an unproductive assets- unlike other financial assets, it neither pays interest nor dividend.

Buffet once said- its dug out from one hole in earth and deposited back in another hole ( apparently underground vaults of Central bank in Newyork holds major part of world’s gold!!!)

Okay. We get it. It’s not productive but then why everyone wants a piece of it? Lets uncover the very interesting tid-bids on gold and its role play in global financial systems. Read on…

Ancient times till 1944- Chapter 1

From the longest known times, Gold has been the ultimate store of wealth- the shiny, golden piece of metal with literally no productive use has been known to be the most powerful thing on earth. One who holds the Gold is KING. World and kingdoms didnt have paper notes like we have today, instead it had coins, medallions made up of gold, silver and other metals. Since gold was rarest and shiniest, it commanded highest value. When the paper currencies were not in trend they used Gold as medium of exchange and hence Gold was the only money available before the present system of paper currencies came into being. When world shifted to paper currency or Notes ( presumbly because it offered ease of carrying large quantities), then also it linked back to the gold. 

What changed in 1944 and then in 1971?

Till 1944, countries were on a currency system which needed sufficient gold reserves for a country to print currencies- meaning if you came to RBI with 100 Rs note, RBI would have paid you gold worth 100Rs against it and if RBI had 5000 Gms of Gold every piece of currency printed by it would have been linked with this in effect creating a celing on the currency a country could have printed. Means AGAR GOLD NAHI TO CURRENCY BHI NAHI.

Post world war II, this system collapsed and countries needed to print more currencies to help themselvs out of depths and destruction caused by 2 massive world wars. Hence the world annointed US dollar to be the ultimate currency of the world and pegged their respective currency to USD and USD in term was convertible into Gold ( priced at 35$ per ounce!!!). Net effect of this was that it freed that country from maintaining equivalent gold reserve and it started measuring its currency relative to USD instead of Gold.

But this system too didnt last long and collapsed by 1970 giving rise to current system of currencies in 1971. US was embriled in an economic crisis and vietnam war making it diffciult for it to manage the linkage of USD to 35$ value peg to Gold. When the world saw its reserve currency struggle, it panicked and that panic gave birth to present system of currency which is called FIAT CURRENCY system. The period between 1944-71 is known famously as BRETTON WOODS era which was joined by 44 countries and where every country pegged its currency to USD at a fixed rate and USD in turn to Gold at 35$ per ounce ( today 2400$ oer ounce, 1 ounce~ 31 gms of Gold).

What changed after 1971?

USD freed itself from free convertibility in Gold and rest currencies too freed themselves from fixed peg to USD. They became floating exchange rates, meaning a currency’s value dependent upon its demand and supply. 

So we see Gold’s dominant role came to a halt in 1971 with Gold backed currencies regime totally replaced by regulation/policy based currency regime. 

But Gold is not going anywhere…

Recent few years have seen almost all countries increasing their gold reserves. What happens is that central bank of the countries invest their surplus reserves into financial assets like Bonds and Gold. iIn 3 months of April-June 2024 various central banks across the world bought a huge 183 metric tonne of Gold for their reserves with Turkey, India and China being 3 major buyers. 

As per an estimate Indian household has approximately 25000 tonne of Gold in their homes and at today’s price of Rs. 7000 per gram, its a huge huge liquid wealth that we all sit upon as a country. With prominent central banks like RESERVE BANK OF INDIA too continue to shore up their reserves, we know that we are on right path by trusting in Gold.