Why millionaires - and all of us - must buy gold - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
Why millionaires - and all of us - must buy gold A  A  A
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23 JUNE 2012


There are various jokes about how to become a millionaire.

Warren Buffett and others have often said that it is easy to become a millionaire. "Start with a billion", they suggest, "and then start an airline". The King of Good Times must not be laughing at that one!

But there is a way to live like a millionaire one day and then suddenly find that you cannot afford to live like a millionaire anymore. The money that you thought you had to live very well in the future, is no longer enough.

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And how does one accomplish such an achievement?

The easy answer is: Sit tight and do nothing. Wait for a perfect environment before you decide to do something. Don't plan for the future and pray hard that everything will be fine at the end. And your decline in living standards is guaranteed.

Waiting for the perfect time?

Frankly, with all the bad news around us these days, anyone could justify sitting tight and doing nothing. In 2003 we were all scared about SARS and a global pandemic. Then in 2006, James Lovelockwarned us about global warming that would water-hose the earth. (Today, he says, his calculations were incorrect.)

There is always some news and TV rubbish to keep us worried these days. We could justify doing nothing because of any of the following reasons:

  1. With Pranab as President, walking (hopefully not retrospectively!) will be his main occupation and a key contributor to India's current state of affairs will be missing from action;
  2. Didi runs the East, Amma runs the South, and Bahu may run from the country;
  3. One day Greece is going, the next day Portugal, and now they say Spain is going, and maybe Italy will go - I know people go to countries but where do countries go to?
  4. We cannot send a rocket to the moon, but the INR is heading skywards;
  5. We cannot dig deep enough into the earth to find water, but we can dig our economy into the hole;
  6. The TV experts are saying that the market will go nowhere, then it starts to surge;
  7. The man who said the Index will head to 29,000 or 31,000 has quietly gone away (psst: he plans to write about that!);
  8. I want to invest in mutual funds but my distributor says his family will starve if I do so - he wants me to buy a structured product.
  9. My wife says she cannot eat the demat accounts in which my CBC shares (CBC = Companies built on Corruption) are lying dormant and dead.
So, yes, there is enough reason not to do anything. May as well sulk and wait.

Rise and shine, Sleepy Joe!

But waiting for the perfect time, may catch you off guard in the future.

A London newspaper, Daily Mail, carried an interesting article on what it did cost to live like a millionaire in the year 1992 and what it would cost to live like a millionaire in 2012, twenty years later.

Source: Government data

In 1992, the article explained, a millionaire needed to live in a nice part of London (Chelsea); own a great Rolls Royce car and a yacht; diamonds (I presume for the wife, not the girlfriend!); own a few holiday homes with the ability to head out on a 32-night cruise in the Caribbean (I presume with the girlfriend, not the wife!). The all in cost for that would have been Pound Sterling (GBP) 995,011.

Fast forward twenty years: the year 2012.

The same "consumption and ownership" basket would cost GBP 2,619,720.

That is an increase of 263% over 20 years.

If your savings were not invested well, chances are you could no longer live like a millionaire. The girlfriend or the wife (or both!) may have left you by now.

And buying all those fancy properties would be beyond your "million dollar" wealth.

Basically, to live like a millionaire did in 1992, you would need to be a "2.6x" millionaire.

While the rich have an interesting problem of owning multiple properties and spending 32-nights on a cruise ship, most people have to find ways to meet their basic needs on a daily basis.

It costs more money today to enjoy our "consumption basket" than it did 20 years ago.

The value of paper money is shrinking. It takes more Pound Sterling to enjoy the same luxuries or necessities.

But what if, what if the millionaire in London in 1992 had only gold with him?

No paper currencies. Just solid gold.

And what if he had used gold to enjoy his "consumption basket" in 1992? How many ounces of gold would he have needed in 1992?

And how many ounces of gold would he have needed today, in the year 2012, to enjoy that same consumption basket?

The answer is shocking.

To enjoy the "consumption basket" in 1992 the person in London would have needed 5,077 ounces of gold.

To enjoy that same consumption basket in 2012, he would need 2,497 ounces of gold. A full 51% lower gold than he would have needed 20 years ago (see Table 2 below).

In Pound Sterling he would need 263% more of the paper currency!

Source: Government data

That is because it takes 4.35x more of the paper currency to buy that same ounce of gold today.

Or, put it another way: the price of gold would have to collapse by over 80% to make gold as "worthless" as the paper currency has been.

Even if gold's price fell by 50%, the millionaire would still have to pay the same amount of troy ounces of gold to enjoy the "consumption basket".

So, yes, do buy some gold. Whether you wish to take your wife on a cruise - or your girlfriend!

The percentage of your savings that you should invest in gold depends on many factors and I have given some suggested allocations (see Table below) but evaluate your own situation and your needs.

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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9 Responses to "Why millionaires - and all of us - must buy gold"

xyz

Sep 25, 2012

Its seems you are ignoring the fixed return which you would have got. If you would have generated FD returns @ 9% you would be better off.Can you please share your thoughts on this.

Like (1)

Dr Aniruddha Malpni

Jun 30, 2012

And what happens if you want to take both your wife and your girlfriend on the cruise ?

Like (1)

Satish

Jun 28, 2012

20 years from now , you shall be shaking your head and cursing yourself for not acting on
the Wonderful advice of the Indian Warren buffet

Like (1)

Krishna Kumar

Jun 27, 2012

The comparison would be complete only if the prices of some blue chip companies like colgate, HUL, TISCO. Let us see how it fares against Gold. Don't forget that Gold price is unusually high due to the fear factor.

Like (1)

satheesh babu

Jun 26, 2012

The funny thing is that even though the "paper currency"equivalent value of gold has gone up 500%, it would still need to be "temporarily" converted to the paper currencies to enjoy the benefits. But, that would mean that to prevent erosion of values, we should immediately convert those "paper currency" into real assets useful for life for another 20 years. What can be a basket of such assets? Obviously we can't buy and store food, water, clothes, education, medicines, etc., for the next 20 years. So, what then are the "liquid" or "consumable" real assets (obviously real-estate should be ruled out). And, common men can't go and buy factories or machinery which might generate an income for next 20 years.

Like (1)

Jayant

Jun 25, 2012

Awesome sense of humor! 20 years comparison with GBP is good. Can we have similar comparison for Indian Rs. ? Also can we do similar analysis with equity / equity MF investments please ?

Like (1)

Rajesh Jain

Jun 25, 2012

Gold no doubt has been a very good hedge against inflation, very good investment to maintain the purchasing power of paper currency. but i wonder what it will be 20yrs from now

Like (5)

anupam

Jun 25, 2012

comparative analysis with equities would hav added value to the subject matter...sense of humor deeply appreciatede :)

Like (3)

Amit

Jun 23, 2012

%age increase mentioned in table-1 are not correct. Please check again

Like (3)
  
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