Golden Sentiments

Gold predominantly is of sentimental value to us Indians in particular. Like all asset classes have their price cycles of rise & fall, Gold is hot these days amongst the investing community. Everyone wants to participate in the rally &t ake his slice of the cake. It is having a one way rally for the last couple of years. Lots of stories/theories are floating around with respect to it:

  • the collapse of the American Dollar
  • no other alternate currency to replace the dollar, hence Gold
  • haphazard printing of the dollar by the Obama administration
  • India & Chinese central Banks are hoarding lot of it
  • Gold mines are exhausting, hence fresh supply will diminish
  • And the best of all, if we return to the Gold standard, what gold shall be worth ….etc, etc.

All this has been attracting investor fancy for quite sometime now. So it’s the, me too factor which has also helped the rally.

The recent History of gold & the dynamics of gold, dollar & the rupee. Around 1980’s gold touched a peak of $ 800 odd when the dollar was at around Rs 7/-. Over the next 27 years gold went on declining only to touch $ 800 again in 2007. During this period the rupee depreciated against the dollar & reached Rs 47/- odd. So the same gold for Mr Bill who invested in American dollars in 1980 got back to its base price after 27 years in 2007. On the other side for Mr Manmohan who bought the same amount of gold in rupee terms, for him gold went on appreciating not because the commodity had appreciated but since rupee had depreciated against the dollar.

The India Story, now let’s assume a scenario where India as an economy grows as against the USD & the reverse happens, i.e. Rupee appreciates against the dollar say by 50% to Rs 24/- & gold remains stagnant at the present value, Mr Manmohan will see his value of gold depreciate to half. The Gold price needs to double from here in this scenario for him to meet his base investment amount.

So in that sense the India growth story has an inverse relationship with Gold price.

Let’s dig a little further – Is gold a productive asset? Since, it does not match the virtues of other assets like Land/property, equity, human or debt. All these other assets generate income & many of them appreciate as well & above that all of them have a productive value. As in case of even metals like silver has an industrial use. Here gold as a commodity has a trading platform which is the only means to make money.

Though most of the governments have it in their portfolios &in that sense it carries an economical value one has to understand that none of the productive assets ever had a downward cycle of as long as a quarter of a century. Besides they (Central Banks) also treat gold as a hedge during challenging times.

The International average of gold in Government portfolio is 10.2% at today’s price.

The Sentimental Value -Our consumption of gold is amongst the highest in the world & we don’t have enough gold reserves/mines. Hence we end up importing gold at the cost of dollar outflows. And we are a big market for the gold mining countries/manufacturers globally. In that sense it has an adverse relationship with our balance of payments.

To sum it up Gold is a good investment to the extent that it plays the role of pickle or curd in your lunch. Let’s not forget the Newton’s law “Whatever goes up comes down”.