Saturday 1 August 2015

Is gold really a better asset for investment?

Gold has been a valuable and highly sought-after precious metal for coins, jewellery, and other arts since long before the beginning of recorded history. Running into 2015 for past couple of decades gold process have been showing a consistent positive trend making it a safe bet to invest. Up until the end of 2013 and early 2014 gold was looked upon as the most sought after asset class as a form of Investment. Then, gold had touched almost INR 32,000 per 10 grams, rumours were spreading that gold in near future will touch the level of INR 50,000 per 10gms of gold.  Many fund houses even started with an IPO based on this a new found class: GOLD, on the expectations that gold will rise and give steady but decent returns.

Soon after, gold prices started to fall.  To one’s dismay, gold has now touched an all-time low in past 4yrs of INR 24,000 per 10gms.  This extreme fluctuation has now raised many questions. What led to sudden fall in gold prices?  Is gold indeed an Investment to be trusted upon?  Will gold prices rises in future?  According to a school of thought which says this might be created by China to help them store huge quantity of gold, is that true?

To answer the above question we need to understand why the gold prices rose in the first place.  It is observed that gold rates are inversely proportionate to the overall financial stability of the world but majorly to American economy.  The price of the metal is also determined by its own demand and supply.  Towards the end of 2008, the American economy was hit by the sub-prime crises and the so called Housing bubble, leading to recession in American economy, thus increasing the investor’s faith in this yellow metal.  Also the economic problems in euro zones and with countries like Spain and Greece led to more panic across the countries in world for future wave of depression.  Thus, many countries including China started to buy and hoard the yellow metal, thus increasing the demand of gold vs the expected shortage of gold.
As gold being a metal that needed to be unearthed and gold extractions from the mines were getting deeper, riskier, rarer and hence more expensive.  All these factors led to sudden and steep rise in price of this precious Yellow metal called as “Gold”.

Then, what changed the fate of rising gold prices?  Exact reversal of all the above factors.  The most immediate factor for the drop in prices is strengthening of dollar. Gold is priced in dollars so if the dollar goes up investors marks down the yellow metal.  Dollar is rising because the American economy is on its revival mode and stabilizing from the recession it earlier hit.  The interest rates in America were increased.  The higher interest rates increase the opportunity cost of holding the zero yield assets, thus the money that is otherwise tied up in the bullion investments will earn more return if invested in a treasury bill or other debt. 

The good political news in euro zone also had an impact on gold rates.  The reduced chances of messy default by Greece and hence the break-up of the single currency increased the confidence in Euro leading to the fall in demand for gold.  Another expectation amongst gold fans was that the Chinese govt. who wanted to make yuan a reserve currency would stock up and hoard hefty levels of gold and make its currency creditable, but to surprise China did stock up gold but only little.

So is it all right to say that gold is not a safe asset as a form of investment?  Well that’s for you all to decide.  Investment in any asset should never be lopsided just because it’s showing great returns in a given time period.  Also, investments should be done keeping a longer time horizon in mind.  


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