Why are Indians buying gold? According to the World Gold Council, India's demand for gold crossed 535 tonnes in the first nine months of 1997--more than was sold in the United States and Japan combined this year--making this the largest market for gold in the world.

But the rest of the world is selling, and gold prices have been steadily falling. At below $280 an ounce, the price of gold has touched an 18-year low, tumbling by over 25 per cent in just the last 12 months.

While investors primarily look to gold as a hedge against inflation, with benign inflation throughout the OECD--and red-hot stock and bond markets--gold offers poor returns. While the US stockmarket has risen by 350 per cent in the last 10 years, an equivalent investment in gold would have declined to 70 per cent of its original value.

There are two reasons why the outlook for gold discourages me.

Switzerland, the world's third-largest holder of gold, has announced that it plans to sell 1,400 tonnes of gold. While this will not happen until 2000, its anticipation has effectively put a cap on long-term gold prices.

A second reason is that big gold-buying countries--like Hong Kong, Indonesia, and Malaysia--are in trouble. So, demand from those economies will, for the moment, abate.

Central banks have been net sellers of gold every year since 1989, and in the first half of 1997, they sold 1.6 per cent of their stocks. A change in this trend appears unlikely.

Potentially devastating for gold, a June, 1997, study by economists at the US Federal Reserve made a strong case for the sale of gold by governments. The effect of a sell-off by countries like the US (gold reserves: 60 per cent), France (53 per cent), Switzerland (45 per cent), Italy (35 per cent), and Germany (30 per cent) will trigger off a domino effect.

Gold buffs who claim that this is absurd must look back at the 1870s, when silver coinage was phased out since it was uneconomical for governments, and both Germany and the US liquidated their stocks.

The same argument holds for gold today. Governments earn poor returns on their stocks--around 2 per cent per annum--by lending their gold to bullion dealers. By liquidating their stocks, and investing the proceeds in interest-bearing assets, governments as well as the global economy will benefit, runs the argument.

While the world's stocks of gold are estimated at 132,000 tons, gold holdings in India are pegged at between 8,000 tons and 12,000 tons. And Indians continue to invest in gold more than anyone else.

Partly, this is due to the fall in property prices, and the lacklustre stockmarkets. Tradition and the black economy play a part too. But can we afford to have such a significant proportion of our national savings invested in such a barren--and depreciating--asset?

The payback for the nation, if we can succeed in a campaign to convert gold stocks into financial assets, is huge.

But the consequence of any apathy will be to watch our wealth in gold become a commodity, used only in teeth-fillings and semi-conductors in the next century.   

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