“Paper money eventually returns to its intrinsic value – ZERO” – Voltaire in the 18th century

When we think of money, we think of paper currency – Rupee, Dollar, Pound and so on. What about gold? Is it just a shiny metal using which we can make pretty ornaments? Or Can it also be money? How does it compare against paper currencies like Rupee? Is the quote from Voltaire about paper money valid in the 21st century? Read along to find out.

Gold and Reserve Bank of India (RBI)

RBI holds more than 500 tons of gold

RBI, the central bank of India, has a mandate to hold foreign-exchange reserves. These reserves include dollars, pounds and other foreign currencies. What else does it hold? It holds 557.75 tonnes of gold. Yes, as part of forex reserves. Why does RBI hold gold? It is not a foreign currency. Plus it does not generate any income – no interest or dividend. Being an objective and responsible central bank, it should not waste our money on gold. If RBI was smart, it should have invested in US Government bonds or other government bonds instead, which at least pays some interest.

May be RBI is dumb and sentimental about gold like rest of us. They should learn from other central banks! Countries like USA and Germany, where people are not crazy about gold, will know what is best. We should follow them, right. If you like this argument, you are in for a major shock.

Gold and Foreign Central Banks

Central Banks worldwide hold gold reserves and are adding more

India is not even in the top 10 when it comes to hoarding gold. Our gold is only 5% of total forex reserves.
Gold Reserves
Why are these foreign banks hoarding gold? What do they know that we don’t know? It is simple. They know the truth – Gold is money.

Gold and Inflation

Gold has a better chance of beating inflation than paper money

Okay, so what if gold is money. Why buy gold, when I have my favorite rupee! The answer lies in the inflation. According to our government cost-inflation index table, what you could buy for 100 rupees in 1981-82 will cost you 1081 in 2015-16. In other words, the rupee has lost 90% of its value since 1980-81. Yes, you read it right – 90% of the value. What about gold? One gram of gold was around 100 rupees in 1980 and today it is around 2800. In other words, gold has not only maintained its purchasing power, but it has beaten the official inflation number.

Conclusion

Gold is money and it is advisable to store some portion of your wealth in gold

Gold is money. Like your humble rupee note in your wallet, it does not generate any return – no interest or dividend, but it does the most important thing – it maintains the purchasing power and hence its value. So next time you think of hold some of your assets in cash for a long time, think gold.