Avoid Gold Rush: Gold is Good or Bad Investment Option?

We should participate in gold rush or it is better to avoid? This question can be answered after evaluating gold as an investment option.

When I last checked couple of days back, gold price (24 Karat) in India was at Rs.53,000 per 10 gram (20-Aug’20). In last 15 years, gold price surged at rate of about 14.5% per annum. But still the title of this post says “Avoid Gold Rush”. I’m nuts or what? We will see that.

Some critics of Gold might say, in 2020, gold price has seen a massive surge of about 50%. Hence considering year 2020 as a reference year is not fair. So I thought to do my calculation considering Dec’2019 as base year.

Between year 2004 and Dec’2019 (15 years), gold price surged at rate of about 12.71% per annum. This is also a great number, right? So why my title still says ‘avoid gold’?

By now you might be beginning to think that I’m a gold hater. I’m not. Please allow me to build my case a bit. I’ll come back to the point soon.

Gold Price History (Last 56 Years)

Avoid Gold Rush - Gold Price History Last 57 Years India

This is a price chart of gold for last 56 years. Starting year being 1965 and ending year is 2020. In last 1 year, between 2019 and 2020, gold price has jumped nearly 50% (in 7 months). This is a phenomenal growth by any standards.

But even our stock market had plunged and jumped back nearly as much in the last 8 months. But Gold’s growth is different than Mr.Market’s growth.

Gold does best when the worth of Fiat Money is questionable. Mr.Market’s plays a big role in up-keeping the worth of Fiat Money. How? By creating a demand for the Fiat Money in form of investments. So in a way we can say that, when Mr.Market is not performing, Gold price is surging.

Gold Price Growth Rate

Year-1 (Bought)Year-2 (Held Till)Holding Time (Yr)Price Rs./10gm (24 Karat)Price Growth (per annum)
19642020566312.78%
197020205018411.99%
19802020401,3309.65%
19902020303,2009.81%
20002020204,40013.25%
20052020157,00014.45%
201020201018,50011.09%
20192020135,22050.43%
2020 – –52,980 –

What is shown in the above price table? Let me give you an example of how to read it:

  • 56 Years: Between year 1964 and 2020 (56 years), the price of 24 Karat gold rose from Rs.63/10gm to Rs.52,980/10gm. This is an annualised growth rate of 12.78% per annum.
  • 30 Years: Between year 1990 and 2020 (30 years), the price of 24 Karat gold rose from Rs.3,200/10gm to Rs.52,980/10gm. This is an annualised growth rate of 9.81% per annum.
  • 15 Years: Between year 2005 and 2020 (15 years), the price of 24 Karat gold rose from Rs.7,000/10gm to Rs.52,980/10gm. This is an annualised growth rate of 14.45% per annum.
Let me give you another statistics
Buying YearsHolding PeriodAverage Growth
1964 to 197910 Years16.9% p.a.
1980 to 199710 Years5.0% p.a.
1998 to 201110 Years12.3% p.a.

Suppose a person decided to follow a gold investment rule. The rule was like this: he will buy gold every year, and hold on to it for next 10 years. After 10 years he will sell his gold holding no matter what.

Example:
  • Part1 (Between 1964 and 1979): The person buys gold in Jan’1964 and holds on to it till Dec’1973. This is a holding period of 10 years. In this case, his annualised returns will be close to 16% per annum. Similarly for all years between 1964 and 1979, if the person follows the same rule (buys gold each year, and holds it for 10 years), his average ROI will be 16.9% per annum.
  • Part2 (Between 1980 and 1997): Similarly the person kept on buying gold during the years between 1980 and 1997 – and held on to them for 10 years. In this case his average ROI will be only 5.0% per annum.
  • Part3 (Between 1998 and 2011): For the golds bought each year between years 1998 and 2011, a holding period of 10 years would have fetched him an average return of 12.3% per annum.

What does this statistics prove? Over a period of last 56 years, the rule of 10 years holding time will fetch an average return of 11.1% per annum for gold investors.

This beats inflation, right? Comfortably. This also beats the returns generated by debt based plans. No points for guessing why gold is considered by many as an investment heaven.

Note: The worst 10 years holding period was these: 1988-1997: ROI 4.2% p.a, 1989-1998: ROI 2.6% p.a, 1990-1999: ROI 2.8% p.a, 1991-2000: ROI 2.4% p.a, 1992-2001: ROI -0.1% p.a, 1993-2002: ROI 1.9% p.a, 1994-2003: ROI 2.0% p.a., 1995-2004: ROI 2.3% p.a., 1996-2005: ROI 3.10% p.a.

Why To Avoid Gold Rush?

Till now whatever we have read about gold, it gives a safe-feeling about it right? But now, allow me to present a very contrasting view about gold – as an investment option.

Buying gold, holding for 10 years, earning 10%-12% odd returns seems simple, right? The contrasting view that you are about to hear is also simple. But often we fail to acknowledge the down side of gold-investment. Why?

Because it is human nature. We like investing in physical assets like real estate, gold, art etc. Our human minds value few things which mathematical calculations ignore. Gold is one such asset. Its value lies in the eye of the beholder. If you do not have an eye to appreciate a ‘Mona Lisa’, ‘The Last Supper’, ‘Creation of Adam’ etc, these paintings are like useless brush of colours.

Let’s see the alternative view on gold as investment, and then finally we can conclude with my take on it.

Four Alternative View on Gold:
  1. Has No Intrinsic Value: No matter how precious it is, there are no ways an analyst can assign an intrinsic value to gold. Why? Because the way we know to value an asset, it must generate a cash flow. Gold has none. In fact, it yields a negative cash flow. How? There is a cost attached to keeping physical gold, or even e-gold in a demat account etc.
  2. Has Only Few Buyers: We all have some gold. So how it has “few buyers”? Because majority gold (by weight) is stacked with central banks of the world. Another chunk is held by various hedge-funds of the world. What common public has is only a tiny percentage. Suppose, for some reasons, the present hoarders starts selling gold. Who will buy? Excessive supply will make gold price crash and make it worthless.
  3. Has Better Alternatives: Investing in gold for short term will not yield good returns. Hence I showed you the data behind the logic of holding gold for at least 10 years. But when holding period is like 10 years, we can invest in equity and easily earn 12%-15% returns per annum. Why settle for lesser returns (gold)?
  4. When Dooms Day Arrive: Gold lovers say that, at present inflation rates, one day the value of our currency will become worthless. Sure, this is what inflation does to money. It devalues. Hence we must keep gold. But inflation really means that our Rs.1,000 in pocket will be worth nothing one sunny day? Like 25 paisa coins has no value today? Not at all. We may not have 25 paisa now, but what we have today is Rs.5, Rs.10, Rs.500 etc. If you are afraid about absolute worth of paper money, keep it parked in fundamentally strong stocks. It will be better than carrying gold. Suggested Reading: Dosa Economics.

If dooms day really arrives one day – perhaps there will be no banks, no business, no stocks, no Rupee and not even gold. So let’s not talk about dooms day and sell gold.

Conclusion

When it comes to gold, people often rush into the gold wagon whenever they see a peak. Recently it happened in year 2009-10, and in 2020. But this is not the way to invest in gold. Preferably, avoid gold when there is a rush. Let the price cool down and then accumulate.

What shall be the thought process? Buy and hold for long term. The longer is the holding time the better. But remember, gold will probably never fetch you more than 10%-12% p.a. returns in long term.

Gold lovers also claim that, one day when our “Fiat Money” will become worthless – gold will be our currency. It will never happen. These days, single companies like Amazon, Facebook, Alphabet, Microsoft etc has market value running in Trillions of dollars. To support the whole world’s economy – we will never have enough gold.

Alternative currencies will develop. But gold, I suppose, will never come back. If there is any future alternative to our present currencies, it will be something similar to “blockchain technology” (Bitcoin).

How a common person should treat gold as an investment option? I personally consider gold as following:

How to treat gold:
  • As a saving option: How? It helps me lock my funds so that it does not get spent on needless things. If I’ve some spare money, and I’m not able to get a suitable investment for it, I’ll rather quickly lock it in gold. Why? Because I believe, gold value will at least grow at rate of 10% p.a. in ext 10 years. But when I’ve a good stock or mutual fund to invest in, I forget about gold.
  • Diversification: I’ve my own long term goals. I generally invest in equity to manage these goals. But it is also essential to diversify. Hence I keep a balance by investing in debt plans and keeping some cash in form of fixed deposits etc. But in this portfolio, adding gold, makes diversification more complete. If one can add real estate also in their portfolio, diversification will be even better.
Final Words

People often draw parallel of gold with failed companies like Jet Airways, Kingfisher, Reliance Communication, BSNL, Lehman Brothers, Enron etc. If we will compare Gold will such companies, it will look like an investment heaven.

But question is, why at all investors invested and held on to their investment in such companies? These companies began to show their “will-soon-fail” signs long before it actually happened. People simple ignored it.

Investors must know how to analyze companies. This way such fallouts can be avoided. Let’s not take it as an example to avoid equity and switch to gold-heavy investment portfolio.

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5 Comments

  1. Hi Mani, I love the way you analyze things and combine theory and practical knowledge. On this specific article, I read 2 different opinions (thou views are personal). Rich Dad Mr. Kiyosaki always insists we rely on Gold rather than other investments. Even 2 days back he is saying the same. What is your thoughts.

  2. What surprises me is that people don’t understand that gold is not supposed to generate any cash flow
    It is not an investment it is real money
    Investment has cash flow money doesn’t
    Simple as that
    And there is a cycle where precious metals perform as it is undervalued against currency in that period gold revalues itself
    And what you told about doomsday that if everything collapses gold won’t survive ask this to people of Zimbabwe, Venezuela, Turkey, Argentina and many more
    In Turkey currently people are selling their houses and cars to buy gold
    Why because they do not trust their currency nor the Dollar
    Again I am not saying go and buy 100% of your network in precious metals
    To generate cash flow and beat inflation stock market is the only place a person should be but you need to have an exposure in precious metals up to 20-30% of your portfolio
    Gold is not an investment it is an insurance (which always beats inflation and is currently way undervalued it is just revaluing itself)

  3. Hello Mani,
    I have always been an avid fan of your articles, but in regard to this article I have contrasting opinion, I believe holding as part of the portfolio should be must, but at what composition is the question to be answered, The numbers you have mentioned above clearly specifies that gold has been a safe bet in long term. Gold may not have an intrinsic value but a common man with limited knowledge of investing has used as tool in bad times and we can see the reflection in stocks like Muthoot Finance & Manappuram Finance, where there is drastic increase in their revenue, it explains the gold as very resourceful to monetize cash to support family or business.
    It should have been very accurate if gold growth rate and equity growth rate compared with the same timelines.

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