Is Gold an Investment?
‘An asset is anything that puts money into your pocket’, says Robert Kiyosaki, the author of the Best-selling book ‘Rich dad Poor dad’. Simply meaning that an investment that generates an earning or income is considered an Asset.
Proponents of Gold have long proclaimed that Gold is an immensely valuable commodity, and in a lot of ways it is in fact true that Gold reserves were very important for any government in the past since it was allowed to print only as much paper money as the gold it possessed. But this rule too, which was known as ‘Gold Standard’, was abolished in 1971.
When we say Gold is valuable we must define what ‘Value’ means. Well, ‘Value’ can be quantified in two segments. ‘Usage Value’ of anything can be found out by applying a simple test, which has often been used by Warren Buffett in the past to elucidate Gold’s value. What Mr. Buffett suggests is that we imagine that all the gold in the world is locked in a huge cuboid like structure and then ask ourselves, will the world stop functioning if Gold were to remain in the cuboid henceforth?. If the answer is No, it’s pretty clear that Gold has no substantial ‘usage’ value. Now if we were to apply the same test to Steel, for instance, we can rightly imagine that it’ll be impossible for the world to function without it.
‘Perception’ value on the other hand is slightly more challenging to assess, since it is mainly derived from how a certain commodity is perceived. Gold, in India, is synonymous with social status and wealth and for this reasonadorning gold at weddings or of boasting to relatives and neighbors about the kilos of gold one possesses is a common practice. But this pleasure doesn’t come without a serious damage to the economy as a whole, which is that we, as a country, import the largest quantity of the yellow metal in the world. The consequence of this is that a huge amount of the country’s wealth (approx.. $ 1 Trillion) is locked in a dead asset, which generates no earning whatsoever. Had this amount been diverted into building Infrastructure in the country we would be able to create a huge number of jobs and would not have to rely on foreign borrowings to invest in our economy. Lack of retail participation leaves the government with no respite but to make huge borrowings from foreign governments.
Foreign Exchange is yet another aspect of buying the yellow metal that lies beyond the understanding of the average buyer. Gold is pegged in USD, however whenever a comparison is drawn to hint towards the growth in the price of gold, it’s value in rupee is often used, as a means to arrive at the conviction that Gold is a superb investment after all. In 1980, Gold was at its peak selling at $820/Oz while in 2011, it stood at $1900/Oz (approx. Peak-to-peak Price). Meaning, its price just more than doubled over thirty-five years with a CAGR of mere 2%. Not so spectacular is it? Yet, in rupee terms Gold moved from nearly Rs. 5000/oz to Rs. 95000/oz over the same time period. Even so if you assess the result in CAGR-terms, which comes out at 9% (as compared with 10% on term deposits >5 years in 1980’s)*compounded annually, it is in fact quite lackluster. Interesting thing to note here is that 1$=Rs10 in 1980 while in 2011, 1$=Rs 70, meaning that USD coupled with the changes in price of gold was the contributing factor towards a CAGR of 9%, which is still substantially lower than the bank rate @(10%)1 on deposits of over 5 yearsin 1980’s anyway.
A sum of Rs. 10,000 used to buy gold @2% resulted to a sum of Rs.19,998.90 (excluding $ appreciation over the same period which accounts for CAGR at 6%) in 35 years, while the same sum of Rs.10,000 kept in the bank totaled Rs.(172,413.47)2. Hence, it is clearly evident that in the long term the appreciation of Gold’s real value is negligent as compared to even term deposits in the bank. Had the same amount been invested in equity @17% (Avg. CAGR in last 35 years), Rs. 10,000 would amount to Rs. 2,435,034 (2.4 Cr).
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- https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765 (A rate of 10% has been assumed since in 1980 since 10% was the ROR on deposits> 5 year terms at the time)
- The amount is compounded annually according to key deposit rates for term deposits>5 years. The data can be viewed by visiting https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765