THINK BEFORE INVESTING IN GOLD

People may find it difficult to manage their investments in equities, bonds, real estate, except gold, which Indians love and consider it as a safe haven.

Let us attempt to answer this intriguing but tricky question. What do we mean by an investment asset? It would mean an asset which puts money in our pockets by generating income. For example, a bond gives interest, equities give dividends, house gives rent etc. But, what cash flow does gold give? Probably nothing.

So gold cannot be termed as an investment asset but merely a “speculative item” because the person buying gold is “speculating that the price of the gold will rise in future and he will be able to sell it at a higher profit to realise gains – there is simply no interim income from it”.

Unlike other metals, gold does not have any industrial use other than for making “golden tooth.”

So, why is it so costly? The reason is that central banks (led by the US Federal Reserve) are running their money printing machines continuously, relentlessly and at a brisk speed. The US dollar has lost 97 per cent of its value against gold over the past 40 years. Hence, it’s not gold, which has gone up but it’s the US dollar which has gone down because of the indiscriminate money printing by the US Fed.

Now, has gold risen consistently? No, not at all. International gold prices crashed from $850 per ounce in 1981 to $250 per ounce in 2001, negative return over a long 20-year period. However, the “rupee value” of gold was up during the period only because the Indian rupee, which was `8 per US dollar in 1981 fell to `45 by 2001. Has gold given great returns over a long term 20-year period? No. So the next time you invest in gold, weigh all the factors.