'Gold investment speculative, not inflation-hedge'

Terming investment in gold as a speculative activity and not hedge against inflation, RBI Deputy Governor K C Chakrabarty said on Friday high returns the precious metal offers only reflects high risks associated with it.

Discounting the argument that gold is a hedge against inflation, the senior-most Deputy Governor wondered how a hedge instrument can offer as high as 37 per cent return year after year.

"If gold has been giving 37 per cent return for the past few years, how can it be a hedge against inflation?. . .

The second logic is that gold is a safe investment. How come a hedge gives a 37 per cent return?...that means it has become speculation," Chakrabarty said while addressing the students of the Vivekananda Education Society in Mumbai.

He said analysis of risk-return trade-off shows that anything which gives higher returns is a risky asset.

"In finance, you know there is a risk-return trade off.

"Anything that gives high returns has higher risks associated with it.

"If gold is giving 37 per cent return that means it

is very risky. (But) this risk is not manifested (and) that is why it looks safe.

"I have no problem if you say you are speculating in gold. But don't say gold is hedge against inflation," he said.

Rising gold import has raised concerns among policy-makers as it has increased the current account deficit, the difference between a country's exports of goods, services and transfers (remittances) and total imports.

India's CAD hit a record high of 5.4 per cent of gross domestic product in the September quarter, or at $22.3 billion, majority of which was contributed by the gold imports.

In this context, the government is trying to curb imports by increasing the duty on the precious metal to make it less attractive.

Referring to banking transactions in rural areas, Chakrabarty said transactions are not increasing to the desired level despite addition of business correspondents.

"Number of transactions are increasing because of addition of accounts but transactions are not increasing in the existing accounts. . . (instead) inefficiency has gone up. . .".

He said bank account convertibility was not possible as of now.