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POSTED BY ON December 30, 2010 10:41 am COMMENTS (11)
Is it worth investing in Gold at current price ?
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Dear amit,
Yes if you look at the intrinsic value of gold by dividend discount method it generates no income. So it is zero.. Gold is not about generating income but It is about apreciation just as you buy and sell land without generating any income or dividend per year.
The price of gold is found out with demand and supply. Gold and silver have demand for thousands of years..So it is highly unlikely that the demand goes down to zero in the next 20 years. The price increarse of gold nowadays is not only beacuase there is more people to buy gold but also beacuase value of currency (our indian rupee) is going down..you see gold is not depended on indian rupee alone it has the same value all around the world. Even if indian rupee goes down gold will not loose its value because its valued in other currencies too 😉 . So if our country is in recession gold and silver will be the only assets which will not loose its value…this is not speculation..
thats why experts say one should have some investments in gold and silver because even when stock market goes down due to recesion gold is nort affected ,infact people will have a tendency to buy gold back thus increasing in price.the next move should be to sell some gold and buy equitiy shares at rock bottom. So gold is kind of a shelid to risk in a market crash.
Silver is another asset you should consider. silver has high conductivity and is used highly in electronics…Best bet of buying gold and silver is e-gold and e-silver with a demat account.
@ramesh
i made the observation keeping in mind that gold was used as currency, when the today’s formal currency was not there. i have impression that in not too far past, the countries have to keep some amount of gold for printing currencies for the country. personally i have no gold as investment, and on the contrary, i had bitter experience of gold as holding- i bought 10 tolas biscuit for rs.59-60000/- in 1996-7 for my daughter’s marriage preparation, only to see rate of 10 tolas biscuit rs.49000/- or so in 2001 at time of her marriage.
for intrisic value, should not we take the residual value of the thing after the period for the consideration , in addition to total of these discounted values? if it is, then one has to take residual value of the gold after the period and the intrisic value of gold would not be zero!
@bharat
afaik, dollar is the current standard and has been so for about 40 years now for the majority of the countries.
You are correct that countries keep gold as reserves. But that is not a necessity. They keep it as a hedge against dollar. They dont “have” to.
Thanks for sharing the information about your experience with gold (Not many people share their losses). That too in gold. Even I do not have any investment in gold.
Regarding the residual value, it can be zero also. Apart from the “speculative value” in gold, there is no other value!
i think, in the same article, it is mentioned that gold appreciated 400% v/s buffet’s 140% since 1998 to now! one thing is there..though it should not be considered for investment, but could be a part of liquid as emergancy cash like! it could be better than any currency , as almost all getting depreciating historically!
@Bharat
I have a point to make. How come all (“almost all”) currency get depreciated at the same time. This depreciation with relation to what? Currency conversion only occurs in relation to other currencies. So, all or almost all cannot depreciate at the same time.
If you are implying that they are depreciating against gold. Then flip it over, you can say that gold is appreciating (which is true in recent years). But if gold falls in next few years, then would you say that almost all currencies are “appreciating”!
Please clarify. Thanks.
To be fair to Buffett, for 18 years gold had given no profits (from 1980 to 1998). Ref – http://goldprice.org/30-year-gold-price-history.html
Ramesh
just wanted to share views of Warren buffet on gold , as he is not very excited about gold .
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils (XOM, news, msgs), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
He has certainly stayed on message over the years. Key talking points for Buffett appear to be that gold is expensive to store, has no practical use and doesn’t generate and income. Those are all pretty good reasons to hate gold.”
Link : http://articles.moneycentral.msn.com/Investing/MutualFunds/what-has-buffett-got-against-gold.aspx
@Ramesh
How to find out the fair value of Gold ?
Well, the fair value of gold by the Discounted Cash Flow method is at best zero! If not negative since you have to pay money to store it, by way of ETF management charges or locker annual charges.
In my view, you should never “invest” in gold. You may try “speculating” at your risk!! but always remember that it is a speculation and not value-investing.
Ramesh
Ramesh
Can you elaborate more on Discounted Cash Flow method ?
Manish
DCF involves calculating the next 10/20/infinity years of income generated/dividend by a company after calculating the growth of the company (some do it approx. and conservatively, others do it using “excel” with 2 decimal point precision!). Then, using current and future interest rates, those proximate/exact generated income/dividend are discounted to present values. Calculating the total of these discounted values = the intrinsic value of the company.
Ref. http://en.wikipedia.org/wiki/Discounted_cash_flow
In that sense, since gold does not generate any income, its intrinsic value is Zero.
Ramesh
What is the fair value of gold? If it is more than the current price, please buy it!
Or are you playing the “greater fool” game. I will buy this because someone else will buy it at a higher price in future.
Or you want to buy this beautiful piece of metal for purely aesthetic pleasure!!
You decide.