Jun 22, 2012|
What you should know to invest in gold
Gold is an asset that has dazzled investors in recent times. And investors have all the reasons to be happy about owning gold. Since the end of 1978, the yellow metal has delivered nearly 620% in terms of returns. The following graph is a testimony to the good times that gold has given to people who believed in it and held it for a long time.
Data Source: World Gold Council
Even since June 2011, the precious metal has delivered a return of nearly 6%. Obviously if you compare it to the peak yearly return of 52% that it delivered in September 2011, this return looks low. But nevertheless, there are still investors who swear by gold. And they have every reason for it.
Reasons to buy gold
Gold has long been considered as a natural hedge against inflation. This means that in terms of price of the essential items, gold has not lost any value over time. So if back in 1978, you could buy x number of loaves of bread with one ounce of gold, you can still buy the same x number of loaves with the same one ounce of gold. This is one of the biggest reasons why investors love gold. While inflation eats away returns on other asset classes, till now gold has managed to remain insulated from it.
Another major reason for buying gold is its safe haven status. At a time when uncertainty and volatility have become the words of the hour, gold's ability to preserve its value becomes invaluable to investors. The crisis in the Euro zone, slowdown in US and the seesawing US dollar, all combine to help direct the flow of money to gold. Since the supply of the metal remains restricted, the higher demand can only result in prices moving northwards. True, that in recent times, gold has seen some decline in prices, but most rational investors look at it as an opportunity to invest.
But does it mean that investing in gold comes without any risk? Not at all. Like any other investment option, gold too has an argument against it.
Reasons to not buy gold
The one big area of concern in investing in gold is its price. Like any other investment option, it is necessary to keep valuation in mind when it comes to putting money in gold. The prices of gold have run up quite a bit in recent times. If we look at the following 5 year price chart for gold, we can see that the prices of gold have only moved north.
|Source: World Gold Council|
But prices have corrected since their peak in September 2011. Since then, the price of gold has dropped by nearly 14%. But does that mean that gold looks good to invest in? Unfortunately, there is no clear answer to this question. The reason for this is that unlike other asset classes, it is not possible to pin point a definite intrinsic value on gold. Due to its aspirational value as well as its safe haven status, gold investment is largely driven by what investors expect the price movement to be. So if they expect prices to fall in the future, they sell gold and vice versa. It is more of an individual decision.
Another problem with investing in gold is the form in which it should be bought. Some investors prefer to own gold in its physical form but that has a problem of storage and insurance involved in it. Some prefer to invest in e-gold or gold ETFs (Exchange Traded Funds) but in that case there are transaction costs involved which could cut down the total returns.
Most important reason to not invest in gold is its 'hedge against inflation' status. In fact this is a reason that has been cited by even the legendary Warren Buffett. Though investing in gold can help to preserve the value of the investment. But if in time, it does not cover inflation rates or help earn returns higher that inflation, then what is the point of investing in it?
Though it has its own pros and cons, gold nevertheless has caught the fancy of nearly every investor. And particularly for Indians like us, gold will always remain an object of desire. So the next question that pops into mind is how to go about investing in gold. In the next article we will discuss the various ways in which you could invest in gold. And the pros and cons of each way.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407