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?
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 :-)),
The Safal Niveshak Post