Over the last few weeks gold has been creating new highs because everyone seems to think that gold is a safe investment class.
Dollar / Euro / Pound, etc are unsafe as their respective countries have economic problems.
But will there be a situation when you and I will buy petrol / vegetables in exchange for gold. Will we move back to a barter system? When countries have stopped using gold as standard for printing currency, how will investment in gold (by us or countries) help? When people and countries realize that, everyone will sell.
In India, people buy gold in jewellery form as it can be passed on to the next generation and hence not an investment class.
Surprisingly, (as per reports from the World Gold Council), in Q 2 of 2011, the demand in Gold ETFs (pure investment category) fell as compared to Q 2 of 2010. The increased demand for gold was by virtue of the increase in demand in gold jewellery. India and China accounted for 52% of global bar and coin investment and 55% of global jewellery demand.
So, if there’s a second recession, consumption for gold jewellery will fall and so will the prices. All it needs is India and China to grow slower than last year (these countries need not be in recession but slower growth will have its own impact).
Another fact, gold as an asset class gave positive returns in the decade 2001 – 2011; prior to which it was more or less stagnant. Prior to 2001, we have had economic crisis in other parts of the World and in India but gold never gave returns the way they have done in the last decade.
Buy stocks of strong companies. Keep investment in gold (as ETFs, jewellery, coins, bars, etc) to less than 5% of your portfolio.
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2 comments:
Ranjan,
Somewhere i read based on your age you should determine your portfolio for example when you are in the range of 25-35 where not much big money required 70% equity, 20% debt, 5-10% gold and fixed deposit etc. as age grows and more money needed decrease equity and get more debt of courses gold etc remaining with in 10%.
Hi,
Many personal finance articles do highlight the asset diversification you have indicated. Some points why I have indicated less than 5% (though not a sacrosanct level) is based on the additional points:
- Gold, in India, holds significance as it his passed on by one generation to another (e.g. mother to daughter, etc)
- It is more a consumption asset and not as asset which one would sell (culturally, Indians sell gold as one of the last resort to overcome a crisis).
- Purity of the gold (jewellery) becomes a key aspect of while buying or selling. The other aspects are making and wastage charges. All these reduce the net value you receive while selling gold.
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