Gold - Is it Worth to Buy Now?

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.

Gold & Real Estate - Investment Options?

Many a times I have been asked whether gold is a good investment option. Similar questions are asked about real estate (empty land or built up area).

My response has been both yes and no.

Yes – as long as I am able to make a profit on an investment made in these items, they are an investment class. But so is any other commodity like Crude Oil, Silver, Steel, Rubber, Pepper.

No – as by and large, these commodities have no intrinsic value. These commodities are never sold at a cost price + proft margin. Their value is determined by the dynamics of demand (need to buy) to supply (need to sell).

In case of companies, there’s always a book value of the company, which is the fair value of the company per share. In commodities, there’s no fair value.

Investment in real estate, atleast in India, is fraught with risks many of us are oblivious about. As transaction value is large and so is the inherent risks, the reward (if all goes well) is also pretty high.

Also, if my neighbour’s property was sold at X, does not mean I will get X as a minimum. My property will valued when your ‘need to sell’ meets someone else’s ‘need to buy’. If I am in a crisis and my ‘need to sell’ is high, then Ill get a price lower than X.

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