It’s everywhere!
Whether you read a newspaper, or listen to a radio station, or watch the television, or even just go out in a crowded place…everyone is talking about gold.
Mutual funds are launching gold funds. Brokers are launching e-gold services. Banks are offering loans against gold. Jewellers are offering gold at discount.
The liking for the yellow metal has reached such high levels that I’ve seen people offering me 10 reasons why I must buy gold (and loads of it) before it’s too late!
However, I have my 7 reasons why I am not, and why even you must not buy gold this Akshaya Tritiya…
- If you are buying on speculation that gold prices will continue to rise
- If gold already forms 10% of your total savings
- If you are buying just because your broker or financial advisor is asking you to buy
- If you are buying just because the Chinese – with their huge forex reserves and knowing nothing to do with it – ‘may buy’ huge amount of gold thus taking the prices up
- If you think gold can help you grow your wealth (over the long term, gold helps preserve wealth, not grow it)
- If you think gold can protect you against inflation (read more below)
- If you are buying just because it’s Akshaya Tritiya (don’t mix superstitions with investments; I believe any day I am doing things sensibly is auspicious for me)
On the point about gold being a good hedge against inflation, here are some statistics on international gold prices shared by CBS News:
On Jan. 21, 1980, the price of gold hit the then-record high of $850. By the end of the year, it had fallen to $590, a drop of more than 30 percent. By March 19, 1982, it reached just $316, a fall of 63 percent. On March 19, 2002, gold traded at $293, below where it was 20 years earlier.
The inflation rate for the period 1980-2001 was 3.9 percent. A gold investor who was unlucky enough to have bought at that $850 peak not only would have seen the investment fall by 65 percent in nominal terms by the spring of 2002, but also would have experienced a real loss in purchasing power of about 85 percent. Given this abysmal performance, gold cannot possibly be considered a good hedge against inflation.
Apart from this, though gold bugs make it sound as such, gold is not the best alternative if the worst inflation fears come to pass.
The best way to deal with the risks of high inflation in the future – with a much lower cost to being wrong – is to own stocks of companies that have the pricing power for their products or services.
When inflation runs high, such companies will be able to raise prices and thus maintain their profitability.
By the way, here is a chart that shows the performance of gold versus stocks over the past 33 years. During this period, while gold averaged annual return of around 12%, the same for the BSE-Sensex stood at around 16%.
On an absolute basis, every Rs 100 invested in gold in April 1979, stands at Rs 4,300 today. Against this, every Rs 100 invested in the Sensex then now stands at a much larger Rs 13,700.
Data Source: Gold.org, Ace Equity
So, do I have a negative view on gold?
No!
As I’ve repeatedly said – Don’t treat gold as an investment. Instead see it as an alternative to cash but something that doesn’t lose as much paper currencies when inflation runs high.
Gold does well when all other returns are fake – created by massive printing of paper currencies (something we are going to see for some years to come).
So have gold, but keep it under 10% of your portfolio. Don’t go overboard and speculate in the future of gold prices.
And please, don’t buy gold just because everyone and his mother are buying.
By the way…
- What has been your experience with gold?
- How much gold (excluding jewellery) do you own as percentage of your total savings?
- If you are buying gold now, what are the reasons for the same?
Let me know in the Comments section below.
But whether you are buying or not buying gold, have a great day!
Until next time (if I survive after my wife reads this post :-)),
Vishal Khandelwal
The Safal Niveshak Post
The last 4 odd years have been very uncertain compared to a few decades prior to 2008. In this crises created by a few, Central banks and governments have resorted to currency printing to conveniently share the sins of these few with the masses. The public unknowingly (and possibly had no choice) provided these bailouts. This pain will therefore go on for some time. Some article mentioned US would take a decade atleast to get back on track, so there are 6 more years to go.
Gold therefore may continue to be a decent bet. Dont see the need to hoard it but yes 5 to 10% of your portfolio (including pleasing your wife) may not be a bad idea. But in your financial plan factor negligible return. It is similar to staying in a very posh locality but any such property has zero cash inflow, since you have to stay in it !!
Looking into the past data and predicting future is a funny thing…
1992-2002 -> sensex giving negative return, investment in PPF, NSC has more than doubled in that time frame
again, no asset class has given return anywhere near to indian equity market for the yr 2003-2008 (before crash) .. neither we should expect one…
Then the return of gold from 2008 onwards-
needless to say the return in real estate in India for last 15yrs…
it just gives us an amazing feeling while looking at the past data… but they have hardly anything to do with future..
so unless u r an expert in some asset class, go for diversification (ratio??? – determine it by your comfort level – surely not by the thumb rules like 100-yr age = equity, upto 10% in gold, rest in debt)
One thing to be added in your post is the form of gold to buy. ETF is a good way to build the 10% and the traditionalist his amount for his daughters wedding.
Keep gold for emergency collateral,
Coins pushed by banks is a poor choice as very few take them as collateral.
One method of buying jewellery as a investment is to pick the worst design in a showroom( may come a little cheap)..which no body will be found dead wearing it. keep this— no wear and tear, stash it in a locker. as this is gold marked it can easily be exchanged when time comes.
Am I right…
incidently all my neices don’t touch gold jewellry…..somethig to do with style…( I am out of depth here)
Just a crazy thought, how do you calculate the intrinsic value of Gold because you have mentioned “If you speculate the gold price is going to rise”.
I don’t have any gold as of now, but would certainly like to add 10-15% of my portfolio. If I am not wrong, the better time to buy gold is when the stock market is doing great, that’s when people move from yellow metal to other capital market assets.
Dear Vishal, It was great to read about your views @ Gold. I feel it does make sense that Gold should form a very limited portion of a portfolio. What is your opinion @ other metals which have industrial use viz. Silver & Copper.
Should not get a gold from relation and neighbours. It will spoil your health and growth.