Gold – Investment or Insurance?
After real estate, the second most favored investment destination in India is Gold. There are many reasons for this behavior. First, we have seen recent spurt in Gold prices from Rs. 8-10,000 per 10 gm to 28,000/10gm over last four years. Second, many people have cash income, on which they do not pay tax and invest the same in gold and real estate.
Let us do some Maths and look at the past returns from Gold. Below are two gold charts, the first one is from 1344 to 1998 and shows price of gold in real dollar terms. The second is from 1971 to 2011, and shows price in nominal dollar terms. (courtesy gold-eagle.com).
Both charts would look very different to the untrained eye, because both the time period and scale are very different. Also, the first chart shows price in real dollar value, and second chart shows the same in nominal dollar value.
What clearly stands out is the very poor return from Gold, if we exclude the last two years. Gold price gave almost nil return (in US Dollar) from 1980 to 2004, and that is a pretty long period to have nil return. In fact, if you look at the first chart, gold price has been relatively stable, with some ups and downs.
The recent spurt in gold price was aided by money printing by US Fed and ECB, fear of collapse of Eurozone, and probable speculation by the biggest investment bank in the world.
Gold is pretty much a useless commodity with no real economic use, and fancied by Indian homes for women’s jewellery (and men’s too sometimes).
However, it is a also very stable commodity with very poor returns over long periods of time. Gold is most useful in a crisis situation like a war, or a financial crisis.
This makes sense if we think of Gold as an insurance product rather than an investment. Remember, insurance is meant for protecting against crisis, and not for generating good returns. So, are you investing in Gold, or are you putting all your money in an insurance plan?
Happy investing
Source:Valueinvestor.com
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