Monday, April 13, 2015

GOLD- investment of fear

 (This appears in Deccan Chronicle and Asian Age)

People still love gold. However much we tell them that the returns are poor, gold still draws folks to it. Recently on the Social Media pages, I came acros some interesting data:
In 1980 Gold was 1330 and Sensex was 100
In 2014 Gold was 27800 and Sensex was 27000
i.e Gold multiplied by 20 times and Sensex multiplied 270 times.
and the rich Gold Investor got???

One point made was that most of the Sensex companies of 1980 no longer exist or have been blown away out of business and hence do not give the comfort of the yellow metal. The other point made in favour of Gold was that whilst the stock markets can fall as much as fifty or sixty percent from peak, gold never has fallen so much.

Let us address these issues.
The way we invest in to the stock market is critical. When we talk Sensex, we are talking about thirty handpicked companies that account for a substantial part of the market in terms of size (market capitalisation). There is no guarantee that the company included in the Sensex would be around in one, two or twenty years. So, how does one avoid these pick pockets?

Many years ago, I would not have had a fair answer to this apart from saying that the investor needs an advisor who will help hime keep score as well as warn him when a company drops out, when a new one takes its place etc. However, today, I will just tell the person that I will not worry. There are these “Exchange Tradeed Funds” (ETFs) which replicate the index. When there is a change in the index, these ETFs are simulatenously adjusted to reflect the new compoasition. ETFs are passive trackers of the index they represent and the margin of error is very very narrow.

Gold has no intrinsic value other than one of fear. Even assuming that it has now been accepted as an alternate store of value, its price cannot rise too much beyond the cost of manufacture.

The other thing which strikes me is that buying physical gold is the worst possible form of investment. You pay taxes, you pay ‘making’ an/or ‘wastage’ etc which add to your cost and when you sell, you do not get back any of these surcharges. Buying a gold ETF is a better thing.  Of course, I presume that most of the people who buy physical gold, do it either out of ignorance or because it is bough with unaccounted money. Gold is probably the most sought after asset for those who have unaccounted cash.

When I buy a share, I am buying a piece of some business. That business grows and the value of the share changes according to the business. On the other hand, the value of gold depends on things like demand supply, economic uncertainties, fear, value of the local currency vis a vis the US dollar etc.  And gold has no practical use. Of course, if the world were to go back to the gold standard, things would change.
Last time when gold made its big move from under a $1000 per ounce to near $2000, everyone noticed.  So now everyone wants to be there when gold price moves up. All I would say is that this is typical ‘herd mentality’ and not based on any logic. Here we have a strengthening Indian economy, which means that the rupee should get stronger unless there is deliberate action to suppress the rupee to support exports.

I am of the school that firmly trusts a high quality equity investment far more than buying the yellow metal. Everyone of us, I guess has that urge to be invested in everything. If you are one of those, irrespective of what I say, you will end up buying gold. To those kind of folks, I would say- “Go easy. Do not commit more than ten percent of your total money. And please do not buy physical gold. Buy  Gold ETFs if you have to.”

One person said that Gold price will not crash as much as share prices can or do. That is possible. However, share prices do rebound so long as the underlying is intact. As far as gold is concerned, the only underlying thing behind its price, is perception. Not anything that can be labelled as an ‘earning’ capability. Gold is merely a currency of fear.  Think hard before you put your hard earned money in to gold.

R Balakrishnan

April 8th, 2015

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