Jan 23, 2013

Should I buy Gold?

Gold is an excellent ‘calamity- asset’. When the world is in turmoil there is nothing like it. Take any war, famine, natural disaster or economic crisis and you will notice a spike in the price of the yellow metal coinciding with these times. The logic is simple- when you don’t know what currency to hold, you must go for gold. 

Take the case of the Jews during the holocaust. One morning they wake up to discover that it’s illegal to be Jewish. All their assets have been confiscated. Some make a run for freedom carrying what little gold and silver they can hide in their under-clothes to escape the Nazi persecution. In many cases those little bits of gold were the difference between life & death. 

So, it is important to understand gold as a calamity asset. When the world is about to end, there’s only so much you can carry with you.  You are not going to be able to run wearing all your gold ornaments at a time of crisis. Be smart, you are probably better of buying some small gold bars. It is important to understand that you will have to trade this gold for food, shelter or security and buy only for that specific purpose. How much to buy? Well, only what you can grab and run.

I can imagine the reader telling me- ‘don’t give me this end of this world gyaan, I’m looking at gold as an investment’. I’d still tell you that it’s better to be prepared than be sorry. But, I will also analyze it as an investment.

It’s a calamity asset, does well during calamities. The recent spike has coincided with the global economic crisis. That explains the stupendous returns these past few years. But, the big question is, will it continue?
That depends on whether the economic crisis will continue. If it does, then gold should go up. If it doesn’t then gold won’t. From my understanding, the global economy is still weak and it could take at least 3-4 years to regain some sort of stability.  But, investor confidence is improving, and so we may not see gold accelerating the way it has.

There have been endless ‘end of the world crises’ over the past many years and each time the world has only come back better and stronger. It’s not being optimistic, it’s being realistic. Tough times do not last. To put a lot of money in gold in the belief that the global economy will never recover would not be being pessimistic. It would be fatalistic. 

Savvy investors consider investing in gold as a relic from a barbaric age. The reason being gold is considered to have no value. Let me define what we in the investing world see as value. 

Value is anything that improves the quality of life. If I have a bike that I can ride around to reach places, then the bike is valuable to me. I use it to improve my life. Things like cars, washing- machines, TV’s, homes, banks, roads etc. are seen to be valuable. When we invest, we usually look to something that adds value in some way to life. It’s a very simple and sensible way of investing. If the product/ service are valuable then obviously people will come to buy and as a consequence business will do well. So we invest in the business. 

Gold in no way improves my quality of life. It is of no commercial use. There is a possibility that somebody in the future might discover that gold is the answer to all our energy problems. But, till that day comes, it is just a shiny yellow metal. It has been a store of wealth in the past due to its attractive and non-corrosive properties. But, with the arrival of fiat money (currency as we know it today), gold has slowly lost its importance. That’s why we consider it as a relic of the past.

However, I must acknowledge, that people who have invested in gold in the past few years have made money. If they had invested with the knowledge that the world would soon plunge in to a prolonged crisis, then I must salute their skills. If not, then they just got plain lucky! 

One ‘go for gold’ theory that is doing the rounds is that India is becoming rich again and therefore the demand for gold is going to increase. We are after-all the largest consumers of the yellow metal. Sound economic logic. But, go back to my earlier point about value- if Indians continue to waste their money buying gold in large quantities, then we are going backwards and not forwards. 

We will not go on buying gold with no limit. Our basic necessities are food, shelter and clothing. If the price of gold becomes so exorbitant that we have to compromise on these basics then it will be natural for anyone to ditch gold. You can’t eat gold and it doesn’t give you any shelter. You can wear it but it doesn’t really protect you from the elements like clothing is intended to do. 

The other theory doing the rounds is that central banks are hoarding up on the metal. This is true and central banks have been buying up huge quantities of the metal. And this, more than anything else, is the reason why gold prices have rallied in the past few years. The dollar is not seen to be as resilient as it once was, so nations are trying to protect themselves with other assets, mainly gold. 

But, the central bankers in the world know that gold is a useless asset. They are slowly realizing that they are better off with other assets that could help improve their economies in the long- term- which is why many nations of the world have launched sovereign wealth-funds. This enables them to buy all sorts of assets for their long-term economic stability. There is a conscious move among central bankers in the world to diversify their asset basket. So gold is only going to be one portion of this and not necessarily the central portion.

Some amount of gold is okay in a portfolio. But, too much and you could be in trouble when the gold cycle turns. Some of you will still have to buy gold to please the women in your family. Pleasing women follows no logic (and it shouldn’t!), so keep the women in your family happy. Only don’t go over-board.

1 comment:

  1. good observations there. But I somehow feel that Gold is not taken as an investment which has to return any immediate value. The Indian mindset has somehow grown very fond of the yellow metal and I doubt it will change anytime soon.
    That said, I really hope I live to see the downfall of Gold from its present highs. Makes it soo blody hard to gift Missus!!!!