OPINION | Gold is not an asset, and it never will be one: Here is why

India and China are the world’s largest buyers of gold. As per recent data, India alone consumes around 800+ tonnes of gold every year.

Our obsession with gold did not start recently. In fact, traces of gold were found even in the Indus Valley Civilisation.

Gold was more of a jewellery item to us, rather than an investment. But this rhetoric has changed; people are now buying gold with the hope that it will yield them profits. This is where we got it all wrong. Let me clarify it for you.

Gold is just a currency, like the rupee, dollar, and euro; it can be exchanged for goods. In fact, gold is the only universally accepted currency. Just think about it: if you have 10 grams of gold with you, you can exchange it for any local currency, be it in Russia, Brazil, China, Cuba, or Korea.

Gold possesses the ideal characteristics of a currency

1. Non-perishable: Gold does not decay or corrode. Paper currency is perishable or susceptible to damage — water, termites, tears, etc.
2. Universal Acceptance: Any merchant worldwide can quantify and accept gold as payment.
3. Divisible: If you wish to pay 10g and you have 100g with you, you just need to cut it. Imagine the old barter system, and you had a horse to sell; how would you cut it?
4. Portable: You can carry the gold with you. In the earlier days, people used to carry gold and silver coins.
5. Difficult to counterfeit: Remember the rupee demonetization in 2016? This would never happen if gold were the base currency, as gold cannot be counterfeited. Chemists have tried and failed.
6. Store of value: Inflation does not erode gold savings. In fact, gold retains its value much better than rupees or dollars.
7. Ease of recognition: Gold is easy to identify. It possesses distinct characteristics that other metals lack.

On many counts, gold is much better than rupees as a currency, but we are fixated on viewing it as an asset. The anomaly will be clear once I define what an asset is. Assets provide the following benefits.

1. Capital Appreciation
2. Ownership Rights
3. Transfer Rights
4. Measurable Value
5. Income Generation

You might still be thinking that Gold possesses the first 4 of 5 characteristics, and why I am doubling down on saying it's not an asset. The reason is because of “capital appreciation”.

Capital appreciation

Although we see gold prices rise every day, the reality is that fiat currencies like the rupee and the dollar are being devalued.

The above chart shows gold prices against the rupee (XAU/INR). Since 2020, gold prices have risen by 250+ per cent. In reality, gold has stayed constant, and the rupee has depreciated against it. I have drawn a blue horizontal line indicating a value of ₹1112879.7 as of 2020.

I just inverted the chart to explain the concept to you. The blue horizontal line remains at ₹1112879.7; the fall you see can be equated to the devaluation of our fiat currency. It just means that gold has stayed the same, but our currency buys less gold today than it did in 2020.

So, even if you see gold prices go up, that does not mean it is due to capital appreciation; it is due to the rupee's devaluation.

Income generation: Unlike land or a business, gold does not generate cash flow. If you have a piece of land, you can cultivate crops, sell them, and repeat the process indefinitely. Similarly, a business generates cash flow as long as it operates with the right inputs.

Gold does nothing. It just sits there, just like cash. Gold has no management, earnings, or production; it never earns you money like dividends. The only way to generate money is to sell the gold to the next buyer and convert it to cash.

Take the example of USDINR. Just like you buying gold in 2020, you could have purchased US dollars, and they would have appreciated by 34 per cent. The US dollar appreciated against the rupee because it was a stronger form of currency. In fact, any currency superior to your national currency will continue to appreciate over time, because yours is getting devalued.

Although the magnitude is different, 250 per cent (Gold vs INR) vs 34 per cent (USD vs INR), the concept is the same. This is why I am saying gold is just a form of currency, not an asset.

The mighty US dollar is not the supreme form of currency; it is gold. The US Dollar has lost 164 per cent of its value against gold in a similar time frame. The Americans knew this was happening, and hence they removed the dollar from the gold standard in 1971, meaning you couldn’t convert dollars into gold anymore.

You should definitely buy gold, but not because it's an asset, but because it's the most superior form of currency. By buying gold, you preserve your wealth by converting your current rupee-equivalent wealth into gold-equivalent wealth.

Gold will continue to appreciate as long as they keep printing currency, but you know for a fact that the price hike in gold is not because it’s an asset, but because it's a better form of currency.

The writer is a SEBI Registered Investment Adviser (INA000021757), SEBI Registered Research Analyst (INH000025045), and author of ‘How to join the top 1% options traders club’.

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