Continuing with our series of articles on gold, the question of its continuing value as an investment leads to yet another consideration: productivity. In the first article, we examined reasons for the stalled rally in precious metals including gold's failure to react positively to traditionally bullish conditions; in the second article we found that other analysts and observers are beginning to collectively re-evaluate their long gold positions. Now we look at how buying gold influences economic productivity and the findings indicate that it doesn't. Is this another reason to anticipate more downward pressure on gold prices?
In the long run, we all benefit from increased productivity in the economy because that means more jobs, more tax payers, more research and all the subsequent benefits of a growing economy. But, does buying gold lead to increased productivity? The answer appears to be no. Gold is just a shiny piece of metal that sits in a vault someplace. When individuals "diversify" their portfolios, they are effectively taking funds out of potentially productive assets such as stocks in companies that build things and hire people or in bonds that finance new projects that also hire people and buy other goods. Investing in gold means putting the money into a yellow rock that sits and does nothing, hires no one and produces no goods or services.
Eminent banker and Yes Bank chief Rana Kapoor seems to agree. In an article in today’s Economic Times he says that the government and policymakers need to create some superior substitute for gold investments to divert the flow of household savings away from the yellow metal, which he calls an idle asset, and into more productive assets.
This side effect of gold investments is rarely mentioned by investment analysts. The logic is plausible and the large booming gold market of the past five years may well have contributed significantly to today's lethargic economies worldwide.