It is a belief that gold is hedge against inflation. It
is a safe haven investment in a mismanaged world. Let us understand myths &
facts of gold that will clear your mind.
The current options for Indian investors to buy Gold is;
Jewellery, Gold Coins, ETFs or Gold Savings Funds of Mutual Funds. All was
going good till the morning of mid April 2013 when the gold prices suddenly saw
a fall of nearly 12% in dollar terms.
Commodities (including Gold), Real Estate and Equity run on
cyclical movement. Any of this traded at hype will suffer periodic bursts of
sharp rise and bouts of steep decline.
The buyer of gold has theory in his mind. Investors buy gold because of the ‘greater fool theory’ (the next guy will buy it at a
higher price). The second popular belief is that gold prices are supposed to
rise, as it had always happened in the history too.
It is a general
belief that Gold is a hedge against inflation.
Looking at the historical prices of gold and consumer price
inflation, In the 1980s, inflation in the US was around 6%, and gold lost more
than half its value. This myth of gold being a hedge against inflation has been
bunked by researchers many times in the past.
What is fair value of
Gold?
At Rs. 27,000/10gm, gold is higher or lower than the ‘fair value’?
Gold does not generate income. It does not pay dividends. A good business
generates profits, a property generates rent and a bond generates interest
income. Since gold does not generate any return of its own, it can only be new
buyers with expectation of gold price to go up. This is just a speculative
approach.
So, what really drives
gold prices?
Money and commodities are moving around the world with improved
technology in the financial interconnected world.
- Gold is priced in US dollars. Gold prices will go up, if the dollar is weak.
- The price of gold is measured in rupees in India. If the rupee is weak against the dollar, the price of gold will go up to that extent.
Indians don’t remember gold prices crashed from a high of $
850/ounce in 1981 to $ 250/ounce in 2001 over 20 years. In 1981, Exchange rate
was $1/Rs. Rs. 8; in 2011 it became Rs. 45 now around Rs. 54. Weakness of the Indian
currency pushes the price of gold up. The economic mismanagement in India is
remained favorable to gold buyers.
Gold in Indian Context:
In India, Gold has monetary value and social
value too. Showcasing ownership of quantity of Gold is a proud statement in
Society. Gifting Gold in family celebration is a must custom. Why Indians are
so close to gold? While looking back to history of 400/500 years back, United
India has always been attacked by outsiders like Aryas, Sikander, Taimur,
Allaudin Khilji, Portuguese, Dutch, English and many more. During war, people
required to run away with handy wealth (gold) to other places. This insecurity
has developed a social custom of possession of Gold. This still remains in the
mind of every Indian, every corner of India.
In fact, buying gold is
buying fear. So whenever fear is high, the gold will outperform. The fear may
be war, currency weakness, economical uncertainties, countries at risk and lot
more. More the fear, high the prices will be.
Those who have cash on hand
prefer to buy gold as investment. That seems a simple statement but holds too
much quantitative importance.
