Is Gold worth Buying ? A shocking Study

POSTED BY manish ON July 18, 2010 COMMENTS (80)

To understand this Study, we have to go back to years when human civilization started. Surprised! But yes, lets go back to those times where human civilization just started. Those days, economic activity was bare minimum and there were few trades between humans. For example, if a farmer wanted to build a home, he used to give some quantity of grain to carpenter, plumber etc and that system was called BARTER SYSTEM. So goods itself were basically used as currency.

Economic activity grew and then emerged an alternative currency which was in the forms of coins and we had what is called ASHRAFIYA. We had gold, silver and copper coins which were used as currency and it was Emperor who used to control the currency system. Then economic activity picked up further and since there was a limitation to the amount of gold, silver and copper we had, Paper currency emerged and till date such currency is the main form by which we all trade. Though now-a-days, we are witnessing another form of currency which is called Plastic Card Currency/ Credit Currency which if not used judiciously, can be a disaster. In fact,the entire US came to a halt in 2008 as credit currency was mis-used to unimaginable extent.

Is Gold worth Buying ? A shocking StudyToday also, each emperor (so called Government) produces and controls their own currency as DOLLOR, Rupee, Dinar etc. But internationally, gold still remains the purest form of currency as it cannot be manipulated. Now in paper currency world over, Dollar became the most acceptable currency as US economy is still the biggest and almost all countries trade with US. After US dollar, the most acceptable form of currency is GOLD. If you have gold and you are not carrying dollar, you can still buy items in any country of the world but you cannot do so with Indian Rupee. Hence, in economic terms, gold is a currency.

Gold in relation to Dollar

Gold is a recognized international currency and currently Dollar is the most recognized Paper Currency. Hence gold is valued in terms of Dollar and not in Rupee. Now if we go back in the history, in the year 1976-81, gold had a dream bull run. From $100 per ounce in 1976, it had gone as high as $850 per ounce. That rise took place as people feared that US economy would collapse and $ would have no value. That time, US was in war with Vietnam & then came Iranian Revolution – inflation in US was at very high levels and in a way, there was hyper-inflation.

Once the war was over and inflation eased out, Gold came crashing down. In the year 1990, it was $400 per ounce and in the year 2000, it was close to $250 per ounce. That means the effect of bubble was so big that even in 20 years, the gold could not recover its original price and was languishing at less than 1/3 of its peak price. So please don’t be surprised if you will be able to buy gold again at levels of Rs 10000-12000.

Gold Price Chart from 1975 to 2010

Is Gold worth Buying ? A shocking Study

Now, Dow Jones was at 10000 in the year 2000 and today also it is at same levels. The US economy is in bad shape and in last 10-12 years, it has not really made any significant progress, rather its debt is so much so high, that there is a fear that US would only have to print further paper currency i.e., dollar either to repay the loan or to keep in the economy going. The moment any government print notes without significant growth in the economic activity, the currency loses its value because of high inflation as same quantity of goods and services are being chased by more money. Anyway, US government is printing billions of dollar just to keep the economy afloat.

So, the rise in Gold is happening on the background that the most recognizable international currency is loosing its value. If US economy further goes down and government there keeps printing notes, again gold may rise in dollar terms. Such fear exist, even in 1979-80. We don’t know what lies ahead as we are not astrologers.

Dollar in relation to Rupee

In the year 1980, $1 was equal to Rs.8 and today as we are writing this article, $1 = Rs.46. Dollar has appreciated more than 5½ times in last 30 years. In the year 1991, there was a time, when Indian government was literally bankrupt and they had to devalue INR more than 25% in just a single day, just to repay the debt we had. That was the time, India was liberalized and government opened their economy and allowed foreign companies to do businesses. Since then, India has grown dramatically. The fact of the matter is that in the year 1991, sensex was close to 1000 and today it is at 18000.

Is Gold worth Buying ? A shocking Study

As Indian economy keeps rising and US economy keeps doing down or at the max stands where it is, the likelihood is that dollar should depreciate. In the year 2007, dollar had depreciated to as low as Rs.37.

Gold with relation to Rupee

Gold was Rs.1450/- in the year 1980 and today it is Rs.18800/-. The rise of 13 times in last 30 years @ 9% p.a. But 5½ times of such rise is on account for Rupee depreciation in terms of dollar. So if we were to analyse the rise in gold price in relation to rupee alone without taking dollar factor, it is only 2.35 times. You see, even in terms of dollar, gold has risen only 1.5 times in last 30 years.

What can happen in future?

As we have said, we are not astrologers, so we can’t predict future. Though we can give some options that may happen:

  1. If dollar in comparison to INR were to stay at the same level of 45-46, then there is a likelihood that gold may rise further.
  2. If due to the sheer strength of Indian Economy, dollar flows to India by way of FDI, FII etc continues, rupee would strengthen and that would mean that even if gold were to rise in dollar terms, it will still decline in rupee terms. In fact, as it happened from 1980 to 2000 that gold kept going down in dollar terms but since the rupee was depreciating in dollar terms, the gold kept rising in Rupee terms. The reverse can happen now and gold may decline in rupee terms.

Basically, the price of gold depends on currency movements; for example,  in Yen terms (Japan) gold have moved 240% & in Pound terms (Britain) 390% in the same period (Check below Chart).

Is Gold worth Buying ? A shocking Study

And you already know about Gold price in Rupee term. So what do you feel – whether India will grow & its currency will appreciate or economy will slow down & our currency will depreciate further? We don’t know what lies ahead, but looking at the history, we are not bullish on gold as much as we are bullish on Indian Equities. As long as world keep rising, gold will not give much return. Here we would like to add a recent quote of  legendary investor Warren Buffet – “We live in a world where 80 years out of 100 will be good. But we don’t know which 20 will be bad.”

We always used to suggest investors that gold is not an investment, it is an insurance which would save you in case the entire financial markets were to tumble down. The live example is that of Zimbabwe where, paper currency has lost its value and if you are holding paper currency, it is depreciating at a rate which is unimaginable. You have to carry crores of Zimbabwe currency just to buy a loaf of bread. Now if you are holding gold, you can actually buy or barter goods there. At least, you can go to neighboring country South Africa and buy what you want as gold is recognized everywhere.

Now, if an average Indian household were to look at their asset allocation, they already hold more gold in the form of jewelry or otherwise than they hold Indian equities. In fact, Indians are the biggest consumer of gold. One must consider gold as part of asset allocation tool and over-boarding on it may not be that a great idea. It may happen that in short run, gold may give better returns but mind you, it is Indian equities that will create a long lasting wealth for investors.

One more important point to note

It is often said that Gold is a Hedge against Inflation. But if you were to look at the graph below, you would find that gold has not kept pace with rising inflation. The blue line shows the actual price of gold and the red line shows the price which gold should have carried in order to match with inflation

Is Gold worth Buying ? A shocking Study

In October 2009 when Gold was $ 1072, Bloomberg made this statement “While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.” First time in 100 years gold has touched it’s inflation price – what will happen next?

What they meant is that it is for the first time that gold price is above its inflation-adjusted price which clearly states that gold is over-priced as it is a sheer currency and nothing else.

Research on investor psychology

The following are Google trend charts. It analyzes a portion of Google web searches to compute how many searches have been done for the terms you enter, relative to the total number of searches done on Google over time. This clearly shows that people start searching for investment which have gone higher in recent past. Check 2nd Graph of Mutual funds which peaked in December 2007 when equity markets were also at their peak. No one was searching for Mutual funds in the end of 2008 or start of 2009 when actually it was the best time to invest. Upto 2007 end when it was best time to invest in gold but no one was searching for it but when price went up, the number of searched went up.

Is Gold worth Buying ? A shocking Study

Few points that we would like to leave open for discussion:

  • What will happen if Indians were to start selling gold as it is at its highest price
  • Why IMF sold gold when it was at $ 1045 per ounce
  • Today experts are saying – Buy Gold. why did not they said when gold was at Rs.5000
  • Gold has appreciated 13 times in last 30 years and sensex has appreciated 140 times. Still why Indians love gold more than sensex

But the problem is “The markets can stay irrational longer than you can stay solvent…“. So never try to time the markets/assets & keep a proper asset allocation.

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates.

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80 replies on this article “Is Gold worth Buying ? A shocking Study”

  1. Bijay Agarwal says:

    Excellent work! Once my teacher at a coaching institute was telling us that if Dollar goes up then Gold price goes down but I could not figure out why Gold still be going up in India. Thanks to this awesome article I am able to figure out why.

    1. Bijay

      Great to know that you understand that now 🙂

      Manish

  2. pravin says:

    “equity is the mother of all investments”. thats a old line used by anyone whose life depends on peddling equities.gold is insurance.against the govt.against paper money.if the govts of the world were fiscally prudent ,gold would actually drop in price. in a gold standard era,gold would actually be a poor investment.

    it is only because the path govts and central banks drunk on keynesian and chicago monetarist ideas,have charted a path to destruction of paper currencies of today(nothing new,this is a historical cycle) that gold is today a superior investment.not that equities are bad,but debt? especially so called gilt or sovereign debt? thats toxic.

  3. Kunal says:

    Contradicting article to the above one here :
    https://www.jagoinvestor.com/2008/04/gold-as-investment.html

    1. Kunal

      Yes , thats a 2 yrs old article , and apart from saying why you should invest in Gold , it also tells you various ways to invest in gold .

      Manish

      1. Venkatesh says:

        Manish,
        have you seen this site – http://www.rapidtrends.com/the-six-biggest-myths-about-gold/

        After reading this article and yours, i’m very confused. Are they both just opposing views, or is something that i’m missing?
        -Venkatesh

        1. Hemant , can you follow on this comment by Venkatesh ?

          Manish

        2. @ Venkatesh

          Can you be more specific.

          Articles cannot be directly compared:
          That article is 2 years old.
          That talks about gold in dollar, we are concentrating on rupee.
          Both articles are using different data time-line.

          I would again like to clarify that we are not predicting anything.

          Both articles have one common thing i.e. Asset Allocation –
          “one of the world’s most highly regarded asset allocation specialists, determined that holding between 7.1 percent and 15.7 percent in precious metals bullion reduces portfolio volatility and improves returns.” Quote from your article link.

  4. S S says:

    Informative article, quite contrary to the general belief about gold. We indians don’t look at gold that way. For us, specially ladies it still is an emotional investement. Diversifying a portfolio with reasonable % of gold that too after trend-study..many will not be comfortable. We are yet to adapt ourselves with something called gold ETFs. Buying ornaments and keeping them is simple, it gives feeling that we are holding something precious which is valuable too, that value too depreciates..no one gives a second thought.

    1. Shweta

      I think there is no reason ladies should buy ETF’s or think about gold as an investment , for them as you said its something which they cherish to have , and thats enough to buy it , even if it does not increase in value , because its value is not in how it grows in price , but how happy you are wearing it or owning it , thats the motive of buying anything or to do anything in life .

      So this article is not for you , Its only for people who look at gold as an appreciation asset . A Financial Planner if tells you that “dont buy gold” will not be an authentic one, he should actually suggest you or ladies to go for it , because Authentic Financial Planners work on making your financial conditions such that you are happy about it 🙂

      Manish

  5. Rupali says:

    Thanks Hemant for this informative Article. I was aware of the Dollar and gold inverse relation but not knowing how exactly it is. Now I have a clear idea about it.

    1. Rupali

      Great to hear that you got more clarity here . Keep commenting 🙂

      Manish

  6. Gopal Gidwani says:

    Hi Hemant,

    Very nice article with so much of deep analysis. Hats off to your detailed research on the article. After reading the article most people will shun gold and go for equity investments.
    Just to look at buying gold from a different angle. This is for parents who buy gold for their chidlren’s (mainly daughters) wedding. For them buying gold is more of a compulsion for the marriage than buying it for investment purpose. In an average Big Fat Indian Wedding parents buy about 25-30 (not sure of the exact figure) tolas of gold. So if a daugther’s father has to buy 250-300 grams of gold at today’s prices it will cost him 300*1800 = Rs 5,40,000. Now if Rs 5.4 lakhs is spent only on buying gold then how will the father take care of the other expenses related to the daughter’s marriage? So this point also makes a case for people to invest a small portion of their portfolio in gold ETFs. Through ETFs a person can accumulate as low as 1 gram of gold a month. So when the daughter/son is born the father can start accumulating 1 gram of gold every month. In 300 months (when the daugther turns 25 years old) the father would have accumulated his target of 300 grams of gold and get his daughter happily married without burning a big financial hole in his pocket.
    So Hemant buying 1 gram of gold every month through ETF can fit in your strategy of having 10% of the investment portfolio in gold. Please let me know what is your opinion on this.

    1. Thanks Gopal for your views.

      I agree with you; it’s a good way to systematically purchase gold.

      But I am not a big fan of Gold ETF due to it’s expense ratio of 1% & in some cases close to 2%(plus demat & trading account cost). It’s too much for Asset class which will deliver returns in range of 6-8% in long term.

      Better one should buy it from their trusted/regular Jeweler.

      1. Oops I missed a word COINS 🙁 “Buy coins not Jewelery”

  7. Deiva says:

    Till now, i was wondering why people never see gold as a currency and its relation with dollar and rupee. This article has thrown lights into areas like this which many people don’t bother when buying gold.

    Thanks for such a wonderful article.

    //Deiva

    1. Thanks Deiva

      Keep commenting

      Manish

  8. Radhey says:

    Honestly Manish, I have seldom seen an article which says don’t buy gold.
    The author on OutlookMoney says “one thing is for sure: you cannot ignore gold, not for the moment at least. There are many ways you can hold gold, but you must remember that as the physical asset gets converted to financial assets and as more people begin to hold gold in the form of ETFs or gold certificates, the volatility in gold is bound to rise. But that’s no reason why you should deter from gold.”

    Its a very nice read at http://money.outlookindia.com/article.aspx?266215. Interestingly, the April 2009 Outlook Money issue had a similar story to tell. Its at http://money.outlookindia.com/article.aspx?91576.
    Happy reading folks.

    1. Radhey

      nice links , I saw that the first article tells us about the relationship of Gold with Dollar , good one .

      Manish

  9. Radhey says:

    Very detailed and informative article. I agree on the facts that the way to buy gold is via ETFs and bars/coins. While this is to be kept at a max of 10% as Manish mentions, its a known fact that bar/coins from banks come at a premium and so should be avoided. Instead, bars/coins from reputed jewellers should be bought.
    Congrats Hemant for the detailed graphs. I agree with you and Sathya on one important point – the fact that we Indians want to invest in something more tangible – gold and real estate.
    The recent Outlook Money (July 14th) talks about Gold in detail for those interested in more !

    1. Radhey

      Great .. I will check it out .. Did the article in outlook money favors buying gold or not ?

      manish

  10. Nikhil Bhagia says:

    Kudos for the article!!!
    the article ingenuously blends theory w/ practicality! 🙂
    a must-read before investing in gold!
    manish echoes my thoughts on sentimental value regarding gold! peops have a notion that gold is far more secured as compared to equity/sensex!
    but, if we dig into the uses of gold……..do we have many??? or is it only a luxury good, when it comes to uses???
    cheerios,

    1. Nikhil

      Good point .. I am not sure how much luxury product is it , ladies might be in love with it , but i dont 🙂

      Manish

  11. Bharti Amin says:

    Hello all,

    It is true that equity has given more return then any other class. But the main fear is that we don’t know how long crude oil will be available on earth. This seems irrelevant, but if we imagine that there isn’t any amount of crude oil is available then we are not ready with other effective alternatives. Today, whatever is we use in our life is however produced by use of crude oil. If that will happened then industries will stop functioning. There will not be any value for any paper money or equity. And only medium for trading will be metals (Gold, Silver, etc). We know that one day this will happen but not sure when.
    I am telling this because when we think about long term investment we should consider other situations which might occur.

    Bharti Amin

    1. Bharti

      nice point , not sure how to react to it , but even I am clueless 🙂
      You have raised a good point .. may be equities are good for long term but not that great for “very” long term 🙂

      Manish

      1. Avi says:

        Bharti/Manish

        I would disagree about the long term implications of fossil fuels or any other entity on equities on so massive a scale that it would cause equities to cease to be the foremost investment vehicle.
        The root of the matter is that equities represent economy at large and the economy/business has always been and will always be.

        If the world comes to a point that there is a severe repercussion of certain events (fossil fuels going extinct or something) on the global economy of unprecedented proportions, then god help us all, no amount of gold, silver or any other assets will save us. Man has adapted and evolved over the ages and that will continue to be the case. I am sure we will tide over all such eventualities over a period of time. Equity, in my opinion, will continue to be the foremost investment vehicle.

        Avi

        1. I agree more with you 🙂 then Bharti

          Manish

  12. kshitij says:

    nice article..

  13. mukesh sharma says:

    Really very – very great work.
    I am reading your blog since 3-4 days. Really all articles are very much knowledgable, accurate and based on fact. I really appriciate your work. You are playing a very big role in the financial development of Indians as well as country.

    Could you pls tell me how much % of portfolio should be invested in Gold?
    Is Gold ETF better option for investment rather than physical Gold?

    1. Mukesh

      thanks 🙂 . Gold can form upto 10% of your portfolio . Gold ETF and Physical gold have their own advantage and disadvantages 🙂 . while if you are looking for pure and pure value appreciatiion and less hassle , you can buy Gold ETF .

      Manish

  14. Sohil says:

    Manish also would love to see a similar post/topic regarding silver….

    As I have read at many places silver to get extinct in next 20-25 years driving price upto 36k dollar per ounce ….

    Hope to see similar topic

    And ya nice share again

    1. Sohil

      Because of the dollar/Rupee relationship the same thing should be true for Silver . But we are concentrating on Gold as from India point ,Gold is everything people talk about , Silver is just in a corner

      Manish

  15. srikanth says:

    I Love it, i can now argue with ppl to not buy GOLD. I was fighting without any solid argument all this while. Now i can back it up with facts.

    Buy equities and stop wearing chains, we are not animals…………..haha
    just kidding

    1. Srikanth

      haha .. that was funny , stop wearing gold , we are not animals 🙂

      One of the best things to learn from this article is that not always there is direct relation ship between something , but rather there can be some other thing responsible for a thing like Dollar is very much responsible for Gold price increase in India . we often dont look at invisible things 🙂

      Manish

      1. Manish

        Your point is that “other things can be responsible” is something which investors rarely understand.

        Here I remember a famous quote of Warren Buffet on stock market “Stock Market is filled with people who know the price of everything but value of nothing.”

        Even in case of Gold, investors are only seeing the price movement and are being carried away by that. One must look at different angles.

        But Equities to us remains the MOTHER OF ALL INVESTMENT.

        In fact, all asset classes are linked to Businesses. Real Estate derives its value from it. Delhi’s land is costlier than that of Jaipur as business is more their.
        So guys, starts understanding businesses and you will understand other investment automatically.

        Ashish Modani

        1. Ashish good point

          Real estate is so much different game altogether .. People if think more clearly , they will realise that commercial property can be a better deal if they really want to give things on rent , but still people buy residential property and give on rent.

          They do not understand the way things functions . a lot even dont know the stuff , so its ignorance too 🙂

          manish

  16. Jitendra Solanki says:

    great Article Hemant!Keep Writing.

    I hope by next year we will be recommending to CFP students good books from Hemant baniwal:))))

    And a very Happy Birthday!!!!(Obviuosly TFTL):))

    1. Thanks Jitendra

      Books for CFP no chance!!

      But some day in future will love to write a book for investors 🙂

  17. Jagbir says:

    completely agreed with Pattu. Reading sort of similar information from here and there but this article is just awesome. You have not left any stone untouched and still maintained the easy to understand language. The inclination towards providing more facts than writing philosophical paragraph is what make this article distinctly ahead. Thanks for this great work 🙂

    Jagbir

    1. Jagbir

      Hemant has done a good work on this article, the best part is connecting all the dots to show the real situation with gold .

      Manish

  18. pattu says:

    Nice post, Hemant & Ashish. Thank you. Shubra has been saying the same thing in his cynical , convoluted and ‘I know better than most people’ way. Your article puts things in good perspective and will reach/appeal to more people.

    1. @ Pattu

      Your views are really valuable to us, as you are way ahead on ladder of Financial Literacy.

      Everyone was saying buy gold & we just thought why don’t give a different perspective.

      1. srikanth says:

        well dat’s scary, don’t give different perspective give your perspective 🙂

        1. Srikanth

          Its their views only , and more than that you should understand whats your view after reading the whole article , if you dont agree , thats very understandable and then you should go ahead and actually buy it because at the end you should believe yourself . The motive of article is to give you more clarity so that you can make your decisions , the motive is not to make decisions for you 🙂

          Manish

        2. @ Srikanth

          My ‘different perspective’ came from this quote of Sir John Templeton

          “If you want to have a better performance than the crowd, you must do things DIFFERENTLY from the crowd.” 🙂

  19. TIP Guy says:

    Hello Hemant,

    Quote “But 5½ times of such rise is on account for Rupee depreciation in terms of dollar”.

    Does this include the two times government purposefully devaluated INR against dollar in mid 90s?

    Best Wishes

    1. Ya it’s written in post & also visible in graph. Dollar Vs INR

      1. TIP Guy says:

        opps! missed it. my apologies for the question.

  20. Sathya says:

    Thanks for such a wonderful article.
    My comments:
    I have seen a tendency that whenever the world faces a financial crisis, people turn towards gold for the rescue. At present the risk/return ratio is not on our side. Risks outweigh returns by a considerable margin. Yes, gold prices might go further up a bit, but I think the pressure should ease up once international markets stabilize.
    This pressure could again build up when the so called ‘baby boomers’ become eligible for their social security(or watever they call it in US) because US is already in so high deficit which will give rise to fears of US defaulting.

    Asset allocation is the most important part which this article specifies clearly. For an Indian marraige, 300gms of gold is reqd which you should buy and keep or gold should be 2-3% of your portfolio, whichever is higher.

    Points open for discussion:
    1. Once Indians start selling gold at its highest price, China will start buying the whole of it…;D
    2. May be IMF foresaw the euro debt, so they decided to sell gold n make money.
    3. Now this is practical: When experts start recommending buys, all we need to do is Sell sell sell. 😀
    4. May be we indians prefer something more tangible than paper assets. I think the main reason should be, in Gold there is no option for the buyer, whereas in equities buyer is spoilt for options. May be we are not much comfortable choosing one from 1000 of options.

    Disclaimer: I still a beginner towards money. Correct me if I am wrong…:)

    1. Great observation Satya

      I would like to add something in relation to your points. Will try to keep it simple:

      A. In past economic events were big indicators (like relay race – baton will be passed & 2nd person will start running) but now a day things start moving before actual event occurs. Gold is rising from last 10 years in anticipation of a big event.

      B. In any asset there are two type or returns Fundamental & Speculative, In case of Gold it seems that Fundamental Returns has come & now it’s in a territory of speculation. I reserve my right to be wrong.

      Your view
      “Once Indians start selling gold at its highest price, China will start buying the whole of it.” I think Gold will not look good on their skin 🙂 . Hope this comment in not racist.

      “May be IMF foresaw the euro debt, so they decided to sell gold n make money.” Poor timers 🙁 our retail investors are smarter than them.

      “May be we indians prefer something more tangible than paper assets.” I agree to this be it gold or property.

      1. Sathya says:

        A. I think investors understood the ball game when the dot com bubble burst…from that point onwards investing towards the real currency started.
        B. Do the gold ETF really buy the amount of physical gold and keep? I doubt…that means wat happening is speculation.

        Wat would I like to show you is… when India started gold ETF in March 2007, the gold price started increasing world-wide and India followed the rally, but during 2008 there was a short bear run in gold. Per Ounce value of gold reduced from $1000 to $700 which is 30% decrease…whereas in India gold declined from Rs.40000 to Rs. 35000 which is only 12.5% decrease, this was mainly due to dollar appreciation from Rs.39 to Rs. 50. Hence, people think there is less volatility in gold prices. Now wat I would like to see is the statistic that shows how much % of gold Indians own. May be a graph would clear the picture as in wat is going on in gold markets…

        Regarding my view:
        Do you think the govt over there would give the gold to ppl to wear as jewellery??…Communist govt buddy….;D

        As the saying goes, World central banks are wonderful regulators but poor investors.:)

        1. Sathya

          nice conversation going on 🙂

          Sathya I am not sure if you are asking or telling , but as far as i know , Gold ETF’s buy the real gold and keep it with custodian , and the price of ETF depend on that gold price .

          As far as I can see , Indians are more into Gold for emotional reasons , they love gold, especially ladies , they consider gold not as an investment , but more valuable than its price , for them 100 gm of gold will still be “100 GM of Gold” and they dont look at it from market price point, untill they have to sell it of in emergency situation

          Manish

          1. Sathya says:

            Manish
            I was asking. 🙂
            I read an article where it said silver has more industrial uses and its reserves are lesser than gold reserves right now. I dont know how trustworthy the article was. But will dig deeper into it. If the article is genuine, then silver prices should be more than gold and wats happening is speculation.

            I would like to know more about how an ETF functions like the managing part of it.

            1. I guess you were reading Vivek Kaul article : http://www.dnaindia.com/money/column_silver-s-a-better-investment-than-gold-here-s-why_1406777

              I think what he has mentioned is correct , however the fanatic behaviour associated with Gold will not reduce and only investors who can go beyond their control and mind can make great use of potential which might lie with silver .

              I actually dont have much knowledge on that subject 🙂

              Manish

            2. Sathya says:

              Yes sir…the same article.
              This is more like the ULIP frenzy. People will buy what they r offered and advertised heavily. I find every major fund house opening a Gold ETF. Well cant blame them also, they r following ‘We should sell what sells in the market’ philosophy.

            3. Sathya says:

              check out this article: http://www.moneylife.in/article/8/7384.html

              It states volumes are not much in case of ETF’s…What will happen which volumes start increasing in the case of Gold ETF’s??as in volatility will increase/decrease?

            4. Hi Sathya

              I don’t want to demotivate you but if you are an investor you are on the wrong track.

              Investors need to keep thing simple but your comments shows that you are stuck in the complex web of information.

  21. pratik agarwal says:

    Great Great Great article…..

    I just read it once till now.. & i feel there are many things to learn from this article…. The points that are covered in this article is just superb…..instead of theoretical points you have tried to make use of practicality too, which is very cool.

    Will need to read it many times to learn things frm here..

    1. Thanks Prateek

      It’s good to hear such comments from a finance geek.

    2. Dear Pratik

      We in fact took long time to write this article as we were looking for something of Jago’s standard.

      Thanks for your appreciation.

      Ashish Modani

      1. It shows that there was much research and study done 🙂 Great work .I learned a lot from this article 🙂 and how one should look at evaluation of some asset class

        Manish

      2. Pratik Agarwal says:

        Truly Ashish the article is well suited with JagoInvestor’s standard 🙂

      3. Jago’s standard???.

        You have set a new standard yourself. Now, manish will have to raise his standard!!!!.

        What, say , Manish??

        1. yea .. the gold article is superb 🙂 , I definately have to work harder than the guest authors 🙂

          Manish

  22. @ All Readers

    Everyone is ready to convince you that gold price will only go higher but we just want to say – gold should be small part of your asset allocation and the reason of buying gold should not be rise in price.

    We will love to discuss anything related to Gold.

    1. TIP Guy says:

      Hello Hemant,

      Good data driven article. You left a very critical question open saying it should be part of portfolio but maintain allocation. What are your thoughts on following:

      (1) We Indians hold quite a bit of jewelery. Almost every household will have some form of ornaments. Can that be considered as enough? Can can be considered as part of overall portfolio allocation?

      (2) Or do you view jewelery as separate. What you really mean by asset allocation is, buy little bit of those commission sucking funds?

      Looking forward to your thoughts!

      Best Wishes,

      1. @ Tip Guy

        Asset Allocation can be seen at 2 layers one at net worth(this also includes your investments) & second at investments.
        As our home is part of Net Worth but not investments(if we don’t want to sell it for some goal).
        Similarly the gold that we don’t want to use for any of the goals including daughters marriage will be part of our net worth & not investments.

        People need to strike proper balance in both the layers.

        1. TIP Guy says:

          Hello Hemant,

          My understanding was investment is sub-part of Net Worth (and not separate). But that’s OK because I think I understand your perspective.

          In the context of financial planning, what are your thoughts on how to strike this balance on investing layer (i.e. my earlier question 2)? How to know what is balance? What investment vehicle? What cost/print point? My question is generic and hence not looking for “depends on individual situation”.

          Qualitatively, it is always easy to say “strike balance” but, I continue to struggle with this non-actionable framework of striking balance. If you think comments section is not a right place, a separate article may be a good option to present/discuss a generic frame work for gold as an investment layer.

          On one side, I want use Gold in my investment layer, but cannot understand full chain, valuing/buying/holding/selling, etc… ?

          Best Wishes,

          1. Hi Tip Guy

            “My question is generic and hence not looking for depends on individual situation” 🙂

            If your question is generic, you must know the answer – but it’s not Generic. Think!!

            I thought I will not complicate the discussion but let me add my views on your comment:
            I hided 1 layer in my last comment (to keep things simple), this layer is YOU. Say if someone is working with Government organsiation he is a GILT(100% safe) so he need or can have more risky asset to strike the balance & vice versa in case of businessman(depending on his business he ranges between bluechip stock to small cap stock). But normally people who don’t understand risk(95%), don’t consider this point.

            Striking asset allocation balance depends on the individual person but will try writing an article is a good idea.

            One more thing – let’s try to understand it through analogy. Consider a person who consulted doctor for some disease. The doctor will not recommend a medicine based on the patient’s familiarity with various prescription drugs but still doctor will take care that he is not allergic to any particular drug. It’s bit different in case of Financial Planner (Sometimes even doctor’s do this if required). In case of Financial Planner he will find out the allergy of investor but before prescribing assets he will try to solve the allergic problem.

            “On one side, I want use Gold in my investment layer, but cannot understand full chain, valuing/buying/holding/selling, etc… ?” Proper Asset Allocation & rebalancing will solve this problem.

    2. Hemant

      that would mean the only reason for one to buy gold would be to have it as jewelry or for emergency purpose , or one can buy for short term for speculation purpose 🙂

      Manish

      1. Hi Manish

        First of thanks for publishing our article once again.

        I was out for couple of days and just could not participate.
        As far as your point on speculation in concerned, I would only like to say that investor at large have a problem of identifying themselves.

        Bhagwat Gita told us to identify “WHO I AM”

        The same question, we also ask investors – who you are – an investor or a trader.
        Mostly what happens is that when Investor buys an asset and it rises, the person who has bought becomes trader and sells. But if the asset price has gone down, he becomes investor and wait untill the price recovers.

        In India, Investors in any asset class especially equity are those who are investors “BY COMPULSION” and not investors “BY CHOICE”

        So to people at large who are not that Financially savvy and/or dont have much time, the advise is that they should avoid speculation.
        Though we believe more on fundamentals and less on technicals.

        Ashish Modani

        1. Ashish

          Nice , I like following point 🙂

          “Mostly what happens is that when Investor buys an asset and it rises, the person who has bought becomes trader and sells. But if the asset price has gone down, he becomes investor and wait untill the price recovers.”

          this happens so much in ULIP these days .. almost every one who comes to know that he has made a mistake suddenly starts saying that its for long term and they are fine
          Do you see this in all the products including Mutual funds , shares , Insurance (LIC) ?

          Manish

          1. Manish

            The point is true with all asset classes but specially when it comes with asset which are market-linked as people think that they are for short term.
            Not many people dump their endowment or money-back policies.

            They just hold them till the maturity. In fact, most of the investors are not aware of what is PAID UP provision in case of insurance. They believe that once they have signed for a 20 year policy, it is mandatory for them to pay all the premiums. In fact, agent tell them like that only.

            Not many people hold their shares and mutual fund for a long time. Other day, i had gone to Reliance Mutual Fund Office when they were celebrating 14 years of Reliance Growth and Vision Fund. I asked them, give me list of even 100 investors who have been holding these funds since inception.

            They just did not have an answer.

            Investors must be taught that “If you find your investment exciting and you are having fun, you are not making money. Good Investments are always BORING.”

            Thats the punchline we use for educating clients.

            Ashish

            1. Ashish

              Thats the crux , most of the people do not understand problem of Debt , so all the people who are into Endowment etc , they will not come to know about the erosion of their worth , they will happily fight with you on the increase in their money .

              Manish

        2. TIP Guy says:

          Hello Ashish,

          Love the point, “investor by COMPLUSION and not investor by CHOICE”. You hit the nail on its head.

          Best Wishes,

  23. Thanks Manish for publishing our post, coincidentally today it is First Birthday of The Financial Literates , our blog . I would also like to thank you for your support & guidance in our blog.

    1. Manshu says:

      Congratulations to you on completing one year. Clicking your link opens up a broken link error message. I wonder if it is only me or the site is down or something.

      1. Thanks Manshu

        May be link went for party 🙂

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