Sunday, June 13, 2010
Gold as an Investment
Of late, we hear many stories about investing in Gold. In India, investing in Gold has come of age lately. In earlier times, gold was mainly used for jewelery in India. Let us attempt to find out if Gold can be a good investment.
Gold since time immemorial, as been used as a currency. People used to use gold as a currency in exchange for Gold. Till 1971, the US dollar was liked to the Gold Standard.
The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold.So for every dollar the US government printed they had to have an equivalent quantity of Gold.
Once the Gold standard was dropped, it lead to the debasement of the currency. The government could print as many dollars as they wanted, provided that there were taers for those dollars.
Gold is primarily used as a hedge against inflation, something which can be used as protection in times of crisis, something which has ever lost value.
There are several reasons why I am adding Gold to my portfolio:
2. I have been noticing that Gold prices have kept going up in rupee terms since childhood. As late as 2005, I had bought gold for Rs 6500
3. The debasement of the currencies by the various governments. Some has to pick the tab somewhere. By flinging more money, you simply are delaying the problem.
4. Its made in limited quantities and Gold is one metal which makes people go crazy. Its not as if tomorrow you are going to find huge Gold reserves.
5. Limited supply and Indians keep hoarding Gold. I doubt if even 20 pc of the Gold Indians buy every year comes back in the market.
In any investment, I also look at the downside. Gold is not going to be Zero rupees. Worst case it may fall 20 pc. We have not yet entered the speculative blowout stage.
If we look at the gold charts from 1975, gold has gone up from 150 USD per ounce to 1200 USD now. A gain of about 8 times. This factoring in the booms of the economy and the recessionary trends as well.
With debt crises all over the world, it is not a bad idea to have some portion of the assets invested in Gold. One can look at the Exchange Traded Funds (ETFs) listed on the NSE as a safe way of investing. This does away with the headaches of storage and gives one liquidity as one gets cash for the sell in 2 days like any other stock.
The price of Gold is also linked to the strength of the US Dollar. This time, we are seeing a situation where both the Dollar is strengthening and still the price of Gold is going up.
If the rupee weakens against the dollar, the price increases in rupee terms even if globally the price does not go up.
Historically, 1 ounce of Gold buys you about 15 barrels of oil. By this ratio, the price of gold should be 1125 USD. The ratio may have extremes but the average point comes to about 10. So, soon, gold should come down slightly or crude oil prices should spike.
The all-time high of gold is 1252 USD. If gold sustains above this level, it would be time to add gold to one's portfolio.
A healthy portfolio is one which is well diversified, with stocks, fixed income investments, some amount of gold and maybe some real estate.
World over, money looks to find a safe haven in times of crisis. The US dollar is going up because as Europe is in a crisis, money finds US to be a safe haven. If US itself goes into crisis then what would be a safe haven for the money?
If you see this channel on the 100 year chart, for gold to touch upper channel it has to hit 6000 USD for an ounce.