Gold has always been known as a number one investment option. But is it really that profitable to invest in gold? The gold prices differ each year. Some years are favorable for investments, some are not. Gold has always been considered a safe investment. However, in 1980 the closing price was $ 593.8 per ounce; in 2004 it was $ 442.1 per ounce.
So this rally has come as a relief to the gold bulls, who were all but
extinct. Back in year 2000/2001, few were recommending gold, when it
was trading at about U$ 260 per ounce. Today however, after a 70 per
cent rise in the price of gold, the interest in this commodity has
only increased. Our advice to you, be realistic and invest in gold
only to the extent it suits your risk/return profile.
The comparative table puts in perspective the returns
generated by different asset classes viz. equity, debt and gold over
different periods of time. It is important to note that during these
different time periods, the stock and debt markets have been through
at least one significant instance of erosion in value. Gold however,
has pretty much had a steady run. Despite this, gold, purely from an
investment perspective, does not compare well with the other avenues.
Then, why the persistent interest in gold?
There are a few reasons for the same:
* The increasing uncertainty pertaining to the US economy and fear
that the US Dollar will continue to weaken has led investors to
move some money into real assets such as gold.
* Rising oil prices, coupled with high liquidity, have contributed
to a rise in inflationary pressures globally. Inflation, simply
put, is an erosion in the value of money and therefore in such
times there is a strong case to move money into real assets such
as gold.
* The threat of terrorist attacks has led investors to diversify
into assets such as gold, which is considered to be a good store
of value (an attack on the US may cripple the US economy and
result in lower stock and property prices for example, but will
not have a material impact on the price of gold).
* Then there is a belief that the long-term bull market for
commodities, including gold, may just be taking off. This view has
been underscored by a persistent rise in the prices of other
commodities too.
Indeed, over and above these, there are 'emotional' reasons why you
should have gold in your portfolio. But in such instances, the
'return' is really not that important.
In our view, gold is a "must" in every portfolio as it brings in an
element of diversification. The price of gold is driven by factors,
which are broadly speaking different from those that drive the price
of other assets such as stocks. This results in what is generally seen
as a contrararian trend. To take an instance, even as stock markets
corrected after the 9/11 terror attacks and the worsening economic
outlook, the price of gold spurted.
Another argument in favour of gold is that from time to time, like all
assets, it may present an attractive short-term investment opportunity
(like in 1999 when it was undervalued by a significant margin). So if,
and that is a big 'if', you can identify such an opportunity, an
investment makes sense. Of course it is important that you square off
the transaction when the price has corrected. Such a transaction would
suit few investors as it involves a very good understanding of
fundamentals as well as timing of the purchase and sale.
But having said that, gold should ideally not account for more than 5
per cent of your long-term investment portfolio. The reason is that in
the long term it is likely that other asset classes, including
equities and property, will outperform gold in terms of generating a
return. While this may not hold true for economies like the US which
are likely to slow down in the future, surely for investors in markets
such as India, other investment avenues are more beckoning.
So this rally has come as a relief to the gold bulls, who were all but
extinct. Back in year 2000/2001, few were recommending gold, when it
was trading at about U$ 260 per ounce. Today however, after a 70 per
cent rise in the price of gold, the interest in this commodity has
only increased. Our advice to you, be realistic and invest in gold
only to the extent it suits your risk/return profile.
The comparative table puts in perspective the returns
generated by different asset classes viz. equity, debt and gold over
different periods of time. It is important to note that during these
different time periods, the stock and debt markets have been through
at least one significant instance of erosion in value. Gold however,
has pretty much had a steady run. Despite this, gold, purely from an
investment perspective, does not compare well with the other avenues.
Then, why the persistent interest in gold?
There are a few reasons for the same:
* The increasing uncertainty pertaining to the US economy and fear
that the US Dollar will continue to weaken has led investors to
move some money into real assets such as gold.
* Rising oil prices, coupled with high liquidity, have contributed
to a rise in inflationary pressures globally. Inflation, simply
put, is an erosion in the value of money and therefore in such
times there is a strong case to move money into real assets such
as gold.
* The threat of terrorist attacks has led investors to diversify
into assets such as gold, which is considered to be a good store
of value (an attack on the US may cripple the US economy and
result in lower stock and property prices for example, but will
not have a material impact on the price of gold).
* Then there is a belief that the long-term bull market for
commodities, including gold, may just be taking off. This view has
been underscored by a persistent rise in the prices of other
commodities too.
Indeed, over and above these, there are 'emotional' reasons why you
should have gold in your portfolio. But in such instances, the
'return' is really not that important.
In our view, gold is a "must" in every portfolio as it brings in an
element of diversification. The price of gold is driven by factors,
which are broadly speaking different from those that drive the price
of other assets such as stocks. This results in what is generally seen
as a contrararian trend. To take an instance, even as stock markets
corrected after the 9/11 terror attacks and the worsening economic
outlook, the price of gold spurted.
Another argument in favour of gold is that from time to time, like all
assets, it may present an attractive short-term investment opportunity
(like in 1999 when it was undervalued by a significant margin). So if,
and that is a big 'if', you can identify such an opportunity, an
investment makes sense. Of course it is important that you square off
the transaction when the price has corrected. Such a transaction would
suit few investors as it involves a very good understanding of
fundamentals as well as timing of the purchase and sale.
But having said that, gold should ideally not account for more than 5
per cent of your long-term investment portfolio. The reason is that in
the long term it is likely that other asset classes, including
equities and property, will outperform gold in terms of generating a
return. While this may not hold true for economies like the US which
are likely to slow down in the future, surely for investors in markets
such as India, other investment avenues are more beckoning.
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