Recommended Read: The Debate over Gold

December 17, 2012

For today’s read have selected an interesting Opinion and Analysis piece in the Business Standard titled: Should RBI allow banks to buy back gold?

This piece beautifully presents two sides of the argument. First up is Ashvin Parekh, National Leader, Global Financial Services, Ernst & Young who argues that the Reserve Bank of India should not buy back gold. Here’s why:

“Gold has shown less price elasticity than other asset classes. Even as the prices have increased six times from 2001 to 2011, the demand in volumes has still risen at a strong pace. Unlike the common belief, gold demand for jewellery is quite price elastic as its demand has gone down, while gold as an investment has gone up.”

The second side of the spectrum is presented by Brinda Jagirdar, Chief Economist, State Bank of India, who is for the option of buying back gold. Here’s why:

“Allowing banks to buy and invest in gold may help monetise the large reserves of gold with the general public, but it might lead to inflation and rupee devaluation. Commodity and capital-market instruments through dematerialisation perhaps are better options. Furthermore, such a move would end up introducing commodity risks into banks’ books. Banks should remain lending and savings institutions rather than transforming into commodity trading organisations.”

We asked our chief faculty, Harish Thakkar to comment, and here is what he says:

“Investment in gold bars and coins is rising faster than in jewellery.  But lack of liquidity by way of inability to sell it back to bank will only discourage this investment route. Gold coins lack the emotional attachment which jewellery has but banks can provide a liquidity boost by buying back the same. The monetisation of gold asset will attract more investment as it is a safer haven than other financial instruments. This will also help curb imports as some of the demand will be met internally thereby bringing down the current account deficit (CAD). A phased and selective approach in allowing banks to buy back gold can keep inflation in check but the government may yet again choose populism over economic viability and decided in favor of lower inflation by not allowing the banks to buy back gold.”

Click here to read the full article on Business Standard. We look forward to hearing your thoughts in the comments section below, or on our official Facebook and Twitter pages.

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