What do Bollywood villain Ajit, star investor John Paulson and Welsh singer Shirley Bassey have in common? The connection, admittedly not obvious, is that all three have an unshakeable association with a four letter word – gold.
For those of us who grew up in India in the 70s, Bollywood movies were all about the villain, none more entertaining than the avaricious and lascivious Ajit. With henchman Robert by his side, ‘Mona darling’ closely behind and lewd one-liners delivered in that menacing nasal drawl, Ajit was a true icon. Prem Chopra and Ranjeet challenged occasionally, but Ajit ruled. Almost without exception, Ajit’s trade was smuggling gold. In fact, in that genre of cinema unless you dealt in gold biscuits, wore a gold chain, and committed a gratuitous rape along the way, you weren’t a genuine villain, just a common criminal. When the Indian government legalized gold imports as part of its economic liberalization in 1992, it’s a safe bet that the one thing Dr. Manmohan Singh did not foresee as an unintended consequence was the demise of the glamorous Bollywood anti-hero; things would never be the same.
The Indian fascination with gold, as a store of wealth and as jewelry, is well documented and completely beyond reason. India is the largest consumer of gold in the world, and conversely gold is India’s second largest import, narrowly behind crude oil. Indian (private) holdings of gold are estimated at close to a staggering US$1 trillion – almost half the country’s GDP and not far behind its entire stock market capitalization! Moreover, this love affair has if anything been intensifying of late. In April, when gold rather dramatically fell 13% in 48 hours, I predicted (in an unfortunately timed CNBC appearance) that this must be good news for India’s current account deficit and by implication the rupee. But wtf did I know. The heck with US investors selling gold ETFs or hedge funds liquidating positions, Indians responded by buying physical gold as they had never done before – $135mm a day with a total 162 tonnes imported in May! The government was forced to intervene, raising duties on gold imports to 8% and taking steps to curb lending against gold. “I once again appeal to everyone to resist the temptation to buy gold,” said Finance Minister Chidambaram, to little effect as a vicious circle took hold – people bought gold as a hedge against inflation and the value of the rupee, but the very act of doing so put further pressure on the currency. Newspapers reported a revival of gold smuggling; a man was arrested at IGI Airport trying to smuggle a gold bar ‘concealed in his abdomen’. Filthy lucre indeed.
Indians of course are not alone in their obsession with gold. Underdeveloped banking systems, a lack of investment alternatives, a parallel economy and a mistrust of fiat currencies are all recurring themes in most emerging markets. I was in Istanbul last week (yet another 50th birthday!) and was intrigued to learn that of the 2800 shops in the famed Grand Bazaar, 1100 deal exclusively in gold – coins, bangles, biscuits and bricks. Turkish rug merchants apparently convert all their cash immediately to gold, and our guide informed us that recent unrest has led to a run on gold in the bazaar. Most significantly, the Chinese are set to overtake India as the biggest consumers of gold in 2013, with reports of equally frenzied buying in April. The South China Morning Post carried a story about a man who showed up at the Hang Seng bullion counter with HK$10mm cash and walked off with gold biscuits stuffed in his Nike bag. Crazy, but definitely an uptick from carriage “in his abdomen”; only a well fed Punjabi could pull that one off.
Legendary hedge fund manager John Paulson is the ultimate cheerleader for the gold bugs. In addition to running a dedicated gold fund, Paulson offers a gold denominated share class for all his major funds. Such is his conviction, 100% of Paulson’s personal investments – and we’re talking 10 figures here – in his funds are in these gold classes, which happen to be down over 60% (on average) in 2013. But Paulson remains unwavering in his views, and indeed his investment thesis is rather straightforward and convincing. Economist Milton Friedman famously said “inflation is always and everywhere a monetary phenomenon”. Paulson simply looks at the post crisis explosion of monetary aggregates, and concludes that this must therefore be a precursor to rampant inflation. Given gold’s traditional status as a safe haven in inflationary times, a return to the precious metal’s upward trajectory is thus inevitable. But as Paulson himself confesses, when exactly this happens remains a huge uncertainly. With Keynes back in fashion (“he’s so hot right now”) a couple of classic albeit cliched quotes come to mind.“Markets can remain irrational longer than you can remain solvent” and of course “in the long run we are all dead”. Inevitably, investors are deserting Paulson’s funds in droves; this is a man who has clearly lost his Midas touch.
So what does one make of all this, should we treat the recent correction as an opportunity to load up on gold or at least buy gold ETFs? Clearly one would be hard pressed to bet against the investment preference of more than half the world’s population. And Paulson pulled off the greatest trade ever in correctly calling the US sub prime crisis, while Friedman of course is a Nobel laureate. But I for one don’t get it. I find gold jewelry rather tacky (images of the very obscene Ranjeet with his hairy chest and gold chains come to mind). Besides, I hate the idea of owning an asset that produces no income, with its future value purely reliant on people being afraid, or at least more afraid than they are today. Warren Buffet has this to say; “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” I agree.
A final word on the third protagonist in our story – Dame Shirley Bassey. Many great songs feature gold in the lyrics or even the title (Gold by Spandau Ballet comes to mind immediately). But 2012 was James Bond’s Golden anniversary, and I happened to download a compilation of theme songs from Bond movies. Amid the galaxy of featured stars, Shirley Bassey stands out, in particular her biggest hit Goldfinger with its rousing climax – “He loves only gold. Only Gold. He loves gold.” John Paulson would approve. And so would Ajit.