Indians love to own gold. It's valuable, less volatile over a long period of time, and is considered a safer bet in times of crisis like a pandemic or wars. However, Larry Fink, the Founder Chairman of Blackrock (the world's biggest asset manager), isn't very fond of the precious metal.
"The commodity (gold) has underperformed the Indian stock market, proving a subpar investment for individual investors. Nor has investing in gold helped the country’s economy," he said in his annual letter to shareholders.
"Compare investing in gold with, let’s say, investing in a new house. When you buy a home, that creates an economic multiplier effect because you need to furnish and repair the house. Maybe you have a family and fill the house with children. All that generates economic activity. Even when someone puts their money in a bank, there’s a multiplier effect because the bank can use that money to fund a mortgage. But gold? It just sits in a safe. It can be a good store of value, but gold doesn’t generate economic growth," he explained further.
Fink, who is also the Chief Executive Officer (CEO) of Blackrock, wants more people to move a larger part of their investments to capital markets.
According to him, the US economy rebounded from the 2008 global financial crisis faster than any other developed country because of the depth in the country's capital markets..
A capital market is where money is raised through the sale of shares, bonds, and other long-term investments. "Countries aiming for prosperity don’t just need strong banking systems —they also need strong capital markets," Fink added.
He wants more people to invest bigger chunks of their surplus in capital markets to build a bigger retirement corpus to budget for longer life expectancy. According to him, the world is facing a "retirement crisis.”
Blackrock has an interest in making this proposition. By the CEO's own admission, more than half of Blackrock's assets (worth over $10 trillion) are investments in retirement plans.
Should you invest money in gold?
It's true that one could make a lot more money investing in stocks than with gold. However, many investors, particularly in developing economies like India, do not have the risk appetite needed for the capital market.
The price of gold went up 7.5 times between 2001 and 2012, according to data from ICICI Securities, a Mumbai-based broking firm. There was a six-year lull thereafter and the rally resumed in the months before the pandemic and now, the price of gold is at a historic high.
In the five years between 2018 and 2023, the price of gold has doubled. Now, someone with a limited risk appetite person may argue that these returns are more than adequate for their needs given that it comes without the anxiety of the stock market.
On the other hand, a more ambitious person may have invested more in equities.
It is important to note that even global central banks have bought record amounts of gold in the last two years — over 1,000 tonnes each year — due to the rising global uncertainties.
Conventional wisdom suggests that gold prices go up when bank interest rates start falling. The US Federal Reserve, and many other central banks including India's RBI, is yet to start reducing interest rates.
So, it would be fair to assume that the recent rally in gold prices isn't over yet.
It's also important to note that gold can't be the biggest part of a person's portfolio. Typically, wealth managers recommend that 5-15% of one's investments should be in gold.
For those who agree with Fink's argument that gold lying in the safe is not adding to the economy as a whole, India offers sovereign gold bonds (SGBs).
Linked to the market price of gold, this paper gold has become an increasingly popular mode of investment in India.
