Jewels no more golden stake

None | ByYOUR MONEY | Dhirendra Kumar
Nov 27, 2006 04:20 PM IST

If you want a gold investment, then buy its bars or coins which will yield true value, writes Dhirendra Kumar.

If you want to advertise an investment-related website on major internet-based advertising networks (that of Google, for example), you will find that the cost depends on what you seek investment in.

HT Image
HT Image

It will cost substantially less to advertise for a mutual fund research website or a stock research website than it will for a site that is about investing in gold.

Since the pricing for Google’s advertising network is, in effect, an auction, this difference evidently means that people who are running websites about gold investing are getting more return on their advertising expenditure than those who are running mutual funds or stock websites.

Does this tempt me to transform from a mutual fund site into a gold site? Not quite, but it does make one wonder how much sense gold makes as an investment and how exactly one should invest in gold.

As far as the websites that are advertised online go, an amazingly high proportion of them are fraudulent, because they always seem to be promoting the stocks of companies that supposedly own gold mines that are about to come good.

Closer home, Indians are apparently buying gold in unprecedented quantities. A recent newspaper report said that Indians buy 1,918 kg gold every day. That’s an expenditure of Rs 179 crore every day, I guess, almost all of it on ornaments worn by people.

I am making this distinction because I once met a jeweller, one of the bigger ones in Delhi, who told me that at least a tenth of his sales were for ornaments which would adorn idols of divines, both in private shrines and public temples.

Does it make sense to look at gold as an investment? If you look at historical gold prices over the last 70-80 years, then it does make sense to think of gold as a good asset type in which to put some proportion of your savings.

Apart from an anomalous period during the late 1990s, gold has yielded around 8-10 per cent a year over most of period since around 1920.

And interestingly, the common belief that gold does better during times of economic and political distress has also held true.

High jumps in gold prices have occurred during 1940s and 1970s, both periods of greater turmoil. From 1965 to 1980, for example gold prices rose 21 per cent a year, more than keeping pace with the high inflation of the times.

By this measure, what is happening now is quite odd. The boiling over of gold prices that has happened over the last five years does not fit into any earlier pattern. However, when one takes a longer view, it is clear that holding five to 10 per cent of one’s assets as gold cannot be too bad an idea.

What is bad is doing what many seem to be doing in the name of investing for gold. We have this idea in our heads that gold is a good investment for bad times, but then instead of buying gold, we buy jewellery. Jewellery is not gold, at least it is not the kind of gold that can be considered an investment.

If you want to buy gold as investment, then you must buy it in a form in which it can reliably yield back its real value without any problems anywhere, after any period. The only form of gold that satisfies this requirement gold bars or coins.

This is actually sold by many banks and comes with all the necessary proofs that what you are buying is actually gold.

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