Gold price is scaling new heights every day. Obviously, there arises this question in everyone’s mind: “Should I invest in gold and take part in the rally?”
The pros that support these thoughts are a downgrade of the US treasury bonds by the rating agency Standard and Poor’s. Apparently, with a weak economy, the US Dollar has to lose its value over time. Hence a rush to safe asset havens like gold by governments, banks, and individuals, all alike. Furthermore, gold has a great demand for ornamental usage in countries like India. The industrial usage of gold includes electronics, computers, healthcare, and glassmaking. In satellites, gold-coated mylar sheets protect the satellites from solar radiation. The supply is limited whereas the demand is ever increasing.
However, despite all these, why gold is not an ideal investment choice for a value investor! Why should you avoid investing in gold as a value investor?
Not a Value Investment:
The prime motive of a value investor is to buy anything worth $1 at 50 cents. It gives the satisfaction of having found value for the money earned hard. However, nobody is going to give you a gram of gold at half the market price or not even at a discounted price unless you buy it from a burglar! Then where do you find value for your money when buying gold?
Cannot Compound Returns:
The secondary aspect a value investor is concerned about is to compound the capital and its returns. Gold never brings cash inflows for you to compound the returns. If you could compound your investment at a simple interest rate of 12%, your investment should double in eight years and four months. Gold has already appreciated six folds since 2003 from $10/gm to $60/gm. Do you think any amount invested in gold will get at least doubled (100% appreciation or a mere single fold) in the next 8 years from what it is now? It seems to be a distant possibility. Furthermore, the pace at which gold appreciates daily that I feel it is purely speculative in nature. It seems to be moving into a dangerous bubble zone.
Protection and Storage Woes:
Physically, it is hard to store gold by yourself and to guard it against thieves. Even if wrapped in a protective cover, oxidation and discoloration could still happen and reduce its price. Okay, you have the option of electronic gold or gold ETFs, paper gold or gold certificates. Even for that, the issuing authority has to physically store gold before issuing you the certificates or demat credit. You have to incur the storage expense, insurance, and management fees for this apart from buying and selling commission and capital gains tax. Nothing comes for free.
Liquidation Concerns:
Unless you hold gold in paper or electronic form, liquidating the physical gold has its own set of problems. Gold outlets are never interested in buying back the gold from you rather than selling. If at all, anybody who is willing to buy gold from you will not be interested in buying gold at the prevailing market price. A jeweler will be interested in just making you ornaments from your gold and returning it back for a fee rather than buying physical gold from you owing to the fear of it being stolen gold and legal tangles after that. Even if you intend to pledge it, with the fear of prices dwindling anytime in the recent future, the lender will be willing to lend only half the current market price.
Thus the only favorable point for investing in gold is diversification of assets as a crisis hedge if you prefer to do it. However, it is not an inflation hedge as the value of gold correlates with the value of money.
Conclusion:
As Warren Buffett said, if you buy a cube of gold, you can stare at it, fondle it, or sit on it but cannot do anything to improve its value. You can buy gold on the presumption that some other greater fool than you would find value in it to buy it from you down the line! Therefore gold is not an ideal investment choice for a value investor.
With the spurt in gold prices, we have a socioeconomic problem in our neighborhood – the crime rates have gone up with scores of incidents of ornament snatch and run. It has become a nightmare for the police.
Gold price has reached such disproportionate levels tempting many to liquidate the gold assets to keep the cash or to move to some other assets.
The arguments in the main article can hardly be rebutted. But the recent spurt in gold prices is really alluring. In India women do have an uncanny fetish for gold. There are two aspects to this fetish. Women think that they look better in gold ornaments. Secondly, gold, particularly those given out at the time of marriage by bride’s father [locally called streedhan] still works as a security for married women, even for those who are working. But when the necessity arises the ornaments are not sold off on sentimental grounds–especially a self-proclaimed chivalrous husband will not touch his wife’s ornaments during financial calamities. As a result the ornaments are on permanent rest mode in individual bank lockers. The fact remains that unless you can enjoy the value enhancement of a particular product, the increase in it’s value has no meaning.
Tradition, however, continues. When the newly-wed bride becomes a mother-in-law, she gifts her ornaments to her bride-daughter or daughter-in-law. It is a repetition. The newly-wed brides follow their mother or mother-in-law, as the case may be and the ornaments again take their places in bank lockers and are in semi-permanent rest mode.
That’s an excellent strategy, buy and hold for a long time (in this context for generations!), peculiar to only value investors, but on the wrong asset class.
Again I remember Warren Buffett’s words here: