Gold: Should I be Investing ?
Gold is going bonkers. At present, all it knows is how to climb up. Central banks around the world seem to have caught the bug of buying gold. China wants it, India bought it, Sri Lanka bought it, Russia openly expressed interest, and probably few more. One common theme in all central bankers buying gold seems to be the desire to maintain the value of its assets. Since the continued supply of printed dollar is flooding the global markets, individual nations believe there will be reduction in value of dollar. And hence these central banks want to hold their assets in gold (rather than dollar). Few other factors that one can think of are as follows:
- Historically, gold is a perceived as safe harbor against collapsing economy, political unrest, collapsing currency, etc. And situations like US/UK sovereign debt, Dubai, Japan’s losing economy, etc does not help. This kind of environment only fuels the gold binge.
- Ordinary citizens in Asia, (note: not investors) have held tremendous amounts of gold in the form of jewelry. It is perceived as a safety net. Enter these sophisticated financial engineers of modern economy, and they too think that investors should hold gold. It is projected as currency not tied to any economy. These financial engineers do not recommend jewelry, but want retail investors like us to either buy gold bars, ETFs, mutual funds, and/or some kind of derivative contracts. So this adds to the gold demand. Do we really need gold ETFs, mutual funds, derivates? How different are those any other commission/fees eating instruments?
- Contrary to how many of us think, people in developed world like US/UK/Europe still have quite a bit of wealth than we can imagine. Sometime early 2009, there was USD 4 trillion lying in money market funds. These are funds waiting to be deployed in equity markets. Where do you think this money is being transferred? Investors in developed world are looking for better returns, and hence the money is flowing in emerging markets, and gold markets. Again this seems to fuel the binge.
Attached below are two charts to show the price of gold in dollar terms and in rupee terms. The way I interpret those charts is that, as the value of currency increases (dollar chart, 1980 to 2000) the gold remains stable. In addition, the rate of growth for gold price is different in dollar terms and in rupee terms. Rest I will leave it to readers to interpret. Any thoughts are welcome, so please leave in the comments section below.
Gold Pricing in US Dollars
Gold Pricing in Indian Rupee
All this discussion is good for academics. The question is, as small individual retail investors, what should we do? Do we invest in gold at this point in time?
To me, it really does not matter. Markets will do what it wants to do. I do not have any control over it. Investment managers of all sizes will purport the idea of investing in gold based ETFs, mutual funds, or some kind of derivatives. All they are doing is increase their asset size and hence their fees and commissions. They will make you feel you are missing the boat.
It is really difficult to understand what the real value of gold is. Gold as a commodity is of no use. Other commodity like oil, agriculture, iron, steel, platinum, nickel etc., are all consumed in some form or the other. At a global level, gold consumption is not high enough to reduce its overall quantity. It is stored and over the years the total gold in world keeps increasing. Assuming I buy gold what will I do with it? I will have to spend money to store it. I will not get any interest on it. So I would have to buy gold assuming (or expecting) that it will increase in value and I can sell at higher price. i.e. I would be buying it as an investment.
Not knowing gold’s future value, can we consider it is close to speculation? Instead, I believe I can invest in equities which I can put some expected value or know how it increases in value.
I am believer in asset allocation. Gold should occupy a place in your wealth portfolio. For us Indians, traditionally, gold is associated with jewelry. Stick to that thought. Buy gold in the form of jewelry for your wife, or sister, or daughter. It will not only act as your rainy day asset, but your family can use it as an ornament. If you need some jewelry, and believe price is high, buy for smaller amount. Buy some type of ring instead of expensive necklace. If you want to buy a jewelry and can wait for couple of years, keep cash and allocate to some form low risk investments like bonds or government certificates. Twenty years down the road, you will not remember the extra 20% that you paid today to buy a small ring.
In my view, buy gold as jewelry for your loved ones, and stick to your traditional values. Keep away from gold as an investment vehicle. There are many other promising avenues for investment.
gold as an investment, Gold asset class, gold pricing, returns for gold investment
gold has increase 1700% in dollar terms while gold has increased 10317% in rupee terms. So doesn’t it tell us gold has given better returns in rupees and hence is an excellent investment vehicle ?
Hello Newbie,
That’s just an observation. But when you put that into context, you will realize its not what it appears to be. In last twenty years, there were two occasions when rupee was formally de-valuated against dollar by our government. In addition, on market basis and on relative terms, rupee has devaluated more than dollar.
Best Wishes,
I have real problems with thinking of gold as a safe haven. Every time there is a crisis, money flows to the USD not gold. The latest example is the Dubai scare. When that broke out, dollar rose and gold fell. At the peak of the crisis, that’s where people were headed too.
Hello Manshu,
Yeah, that’s very true. I agree naysayers that dollar’s strength is questionable in long run, but where’s the replacement? Gold is not even tied to any currency. In my view its a perception.
Best Wishes,
You just blew my mind. awesome.
@Tip guy: right now gold is at the very high so we all may get biased to stay away, but assuming gold was a much cheaper price, would you still have the same observations that do not buy it, after all when its cheap buy more, isn’t that the value investing rules.
Hello Rajendra,
My observations would be still the same.
Best Wishes,
Hi TIP Guy
I would recommend reading ” The power of Gold” by Peter Bernstein. Brilliant book which gives you the right flavour of the evolution of gold from the gods to taking the form of a currency and its subsequent delinking from global currencies.
Gold is a hangover that the human race carries for over 1000 years as it was the formal currency of exchange. Paper money was created to sit on top of gold with its value derived from the underlying value of gold. 25-30 years back we delinked that globally and today no currency in the world is pegged to gold.
So if a martian came to earth he would be surprised as to why we assign value to this metal which has no use.
The point is you dont know when the world will wake up to that fact maybe 10,50,100,500, 1000 years down the line. I stay away from gold bcos 1) i dont understand it 2) I dont know when it could dramatically lose its value globally based on change in human behaviour.
Cheers
Ninad
Hello Ninad,
Yeah, I have read the book “The Power of Gold”. It is good book for someone to know all about gold.
I am of the view that this gold hangover will continue. it is not going to stop.
I also agree with your two points on why you wouldn’t buy gold. It is not a investment vehicle as many make it do be.
Thanks for stopping by.
Best Wishes,
By reading this article, it seems, the gold is inversely responsive to money printing.
Hello Tuan,
I did not get your comment? In dollar terms or rupee terms?
Hi Tip guy,
I agree with u. Gold cannot be an investment vehicle but it is a very good insurance. It is store of value virtually independent of economic conditions. So,In my view everybody should keep this insurance in their portfolio which will definitely help at the time of crisis when paper money may lose value depending upon the conditions of particular country. Cost of this insurance is definitely like one may just keep pace with inflation. I mean inflation adjusted return will be zero or very little. Wt you think?
Regards,
Neeraj
Hello Neeraj,
I think you missed the premise of the article.
I do believe gold should occupy a place in individual’s portfolio. No two thoughts about that. The only question is what should be the vehicle. I believe for we Indian’s it is best to remain with traditional approach. Hold gold in a form of jewelery/ornaments. That way it is put to use in some way.
I am not in favor of these so called Gold ETFs or linked funds or derivatives (they are in paper forms). Small individual retail investors like us should not be thinking of it as investment vehicle using these financial instruments. The financial services industry has created these avenues to generate revenue for themselves using these derivative products. It really does not help individual investors.
Best Wishes,
HI TIP Guy,
This was a very informative article. I have one more proposition for gold which is that “Gold prices are dependent only on India and Indian rupees”. Its because of the following observation:
1. The sale of real gold is maximum in India.
2. The gold has almost always seen a rising trend only in India, its like an indefinite bull run.
3. Compared to Rupee, when USD becomes costlier, the Gold becomes cheaper in USDs and when dollar becomes cheaper, the Gold in USD becomes costly. Its like whatever happen to the currency conversion rates, gold will keep on becoming costlier for us as if its tied to Indian currency only.
Hello Sunny,
Little bit of difference in opinion. The reason one cannot predict or understand the trend is because there are too many variable. And neither of them remains constant. Take for example. The international market uses USD as an international currency. Therefore, irrespective of USD/INR exchange rate, value of USD affects gold prices. Now if you throw INR into mix, then it becomes complex because USD/INR conversion rate is not fixed. These exchange rate changes (not due to market fluctuations) but by governments actions.
If you take a look from historical perspective, gold prices have remained constant in the context of absolute USD/INR exchange rates of 70s and 80s. But in early nineties (i think between 1993-1995), Indian government de-valued INR (against USD) twice to increase competitiveness of Indian products. If you remove these couple of biases, you will realize that real value of gold remains constant. It is keeping with the inflation in INR terms.
So, it does appear the gold is in indefinite bull run, but in reality it is not. All it is doing is keeping its value as per inflation.
Best Wishes,