The Truth About Investing in Gold

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Mir Amir Sohel

6/28/20235 min read

Every Indian woman shares a special bond with her jewellery. Passed down through generations, these precious pieces hold immense sentimental value. Gold, beyond its adornment, also serves as a financial safety net, providing options like gold loans or selling for immediate cash. However, in this blog, we'll shift our focus to gold as an investment tool. Many people, both in India and abroad, view gold as a promising investment opportunity. Now, let's dive into the question at hand: Is gold a good asset for investment? Fear not, for I'm here to guide you towards the answer.

Before delving deeper, let's first grasp the concept of an asset. An asset is a resource held by individuals, corporations, or countries with the intention of yielding future benefits. To be deemed productive, an asset should generate income and appreciate in value over time. For instance, owning a piece of land enables one to cultivate crops, which can be sold for profit. Furthermore, the land's value may increase over the years. In this case, we can consider it a productive asset. Without these characteristics, an asset cannot be classified as productive.

So, is gold a productive asset? The answer is no. However, it's astounding to note that Indian families possess a staggering amount of physical gold, totaling around 25,000-27,000 tonnes. Before we explore the reasons behind this phenomenon, let's examine the historical price of gold. In 1979, it stood at approximately Rs 937 for 10 grams of 24K gold. By 2022, this price had surged to around Rs 52,700 for the same quantity, marking a 56-fold increase over 43 years. On average, this equates to a yearly growth rate of about 9.8%. Now, let's imagine your wise and affluent grandfather purchased 1 kilogram of gold in 1979 for Rs 93,700. Assuming your father is the sole heir, your family would still possess that kilogram in 2022, valued at Rs 52,70,000. Sounds promising, right? However, let's return to reality. Over the same period, inflation averaged at 5.13% per year. Consequently, the value of Rs 1 in 1979 would only be worth Rs 23.56 in 2022. Inflation has eroded nearly Rs 22 lakhs, leaving your family with a mere Rs 30.6 lakhs.

Data Source:World Bank

Now, let's compare this scenario with a productive asset like the Sensex, which comprises the top 30 Indian companies. In 1979, the Sensex stood at approximately 100 points. Fast forward to December 2022, and it had surged to around 61,000 points, marking a remarkable 610-fold increase. This translates to an average annual return of about 16%, excluding dividends. Over the span of 43 years, the Sensex has provided a dividend yield of 2-2.5%. Factoring in dividends, the return increases to approximately 18%, resulting in a substantial 1,232-fold growth. If your grandfather had invested in the Sensex instead of gold, your family would have accumulated 1.15 crore rupees. Adjusting for inflation, a deduction of Rs 22 lakhs would leave your family with 93 lakhs.

Data Source:tradingeconomics.com

By now, you should have a clear understanding of productive and non-productive assets. Now, a question arises: If gold lacks productive value, what drives its value to increase over time? The answer lies in demand, limited supply, and speculation. As Indians grow wealthier, their purchasing power for gold expands, driving its price upward. Some individuals speculate by buying gold in hopes of selling it at a profit, while industries also contribute to the demand. The future increase in gold's price hinges on these factors of demand, supply, and speculation. However, when it comes to the Sensex, its growth aligns with India's development, the lifestyle of its people, and their future earnings. Regardless of one's positive or negative outlook on India's future, it is certain that gold will never surpass the Sensex's performance.

Warren Buffett, the legendary investor, explains in his annual letter (Year 2011) that the second major category of investments involves assets that don't generate any returns but are purchased with the expectation that someone else will pay more for them in the future. Gold falls into this category. Buffett points out that gold lacks utility and procreation. While it possesses some industrial and decorative value, the demand for these purposes is limited and unable to absorb new production. If you own an ounce of gold indefinitely, it will remain unchanged in size and incapable of producing anything. What primarily motivates gold purchasers is their belief that the number of fearful buyers will increase. In the past decade, this belief has proven accurate. However, the rising price itself fosters more buying enthusiasm, creating a self-fulfilling cycle for a while.Currently, the world's gold stock stands at approximately 170,000 metric tons. If we were to meld all this gold together, it would form a cube measuring about 68 feet per side. Valued at $1,750 per ounce, the total worth would be $9.6 trillion. Let's refer to this pile as "A." Now, let's create another pile, "B," with an equal value. With this amount, we could purchase all U.S. cropland, encompassing 400 million acres and producing approximately $200 billion annually. Additionally, we could acquire 16 Exxon Mobils, the world's most profitable company, earning over $40 billion each year. Even after these purchases, we would still have around $1 trillion left as spending money. Can you imagine an investor with $9.6 trillion choosing pile A over pile B?

A century from now, those 400 million acres of farmland will have yielded incredible quantities of corn, wheat, cotton, and other crops, continuing to produce invaluable harvests regardless of the prevailing currency. Exxon Mobil will likely have paid trillions of dollars in dividends to its owners and possess assets worth many more trillions. Meanwhile, the 170,000 tons of gold will remain unchanged in size and remain unproductive. You can hold the gold cube, but it will never respond.

Undoubtedly, when people are fearful a century from now, many will still flock to gold. However, he firmly believe that the current valuation of pile A, at $9.6 trillion, will yield significantly inferior returns compared to pile B.

You can get gold price history from this link https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html

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Disclaimer: I am not a registered financial advisor with SEBI or any regulatory authority. The information provided on this website/blog is for educational and informational purposes only. It should not be considered as financial advice or a recommendation to make any investment decisions. Before making any investment, it is crucial to consult with a qualified financial advisor who can assess your specific financial situation and provide personalized guidance. Remember, investing involves risks, and past performance is not indicative of future results. The content on this website/blog should not be solely relied upon for making financial decisions. Always conduct thorough research and seek professional advice before investing. The responsibility for any investment decisions rests solely with the individual reader.

The Truth About Investing in Gold