All that glitters are not gold is a well-known saying, meaning that not everything that looks precious is precious. In India most people think that the gold has not depreciated in its value over the decades but it’s not true it is an illusion.
First and foremost, I want to share an interesting data with you.
An ounce is equal to (31.10 grams or 3.9 sovereigns)
In 1970 the price of one ounce was equal to USD 38 and INR 285 (1USD = INR 7.5)
Well, gold price is mostly a reflection of the fear and anxiety over the health of world economy. In 1980, US and most developed countries were plagued by inflation. There were other factors adding to the anxiety like high oil prices and political upheavals in West Asia. Gold reached $ 890 an ounce.
In 1980 the price of one ounce was equal to USD 890 and INR 6995 (1 USD = INR 7.86)
In 1990 the price of one ounce was equal to USD 424 and INR 7568 (1USD = INR 17.85)
We could see that the price of gold has fallen significantly by more than 50% in USD terms but in India we did not find the value depreciated because in the same period the value of INR depreciated by almost 220%.
Year 1970 1980 1990 2000 2010
Per ounce Dollar 38 890 424 272 1410
Per ounce Rupee 285 6995 7568 12223 65565
In 1991 India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. This led the government to devalue the rupee. These further made the INR fall to 28.14 per USD in 1992.
In the year 2000 per ounce was $ 272 and INR 12223 (1 USD = INR 44.94)
In the year 2008 the Gold breakeven it’s all time highest price reached in 1980 globally it took 28 years to get the same price for gold. Zero return for 28 years! Adjusting for inflation, a severe loss of capital.
In the year 2010 per ounce was $ 1410 and INR 65565 (1USD = INR 46.5)
We will definitely witness tremendous growth in next 20 – 30 years. And this would imply that there will be significant dollar investment in India’s and INR will appreciate against dollar. What if the prices of gold fall again globally say by 30% and rupee conversion rate remains the same we would also experience a fall in prices. Again what if the gold prices fall globally and rupee strengthens, to INR 30/- to a dollar. It would be a double whammy. The fall would be more.
“EVERYTHING THAT GOES UP HAS TO COME DOWN ONE DAY”