Gold …. Precious Metal or Precious Investment ???

The other day  i got a call from client and he asked me whether the money which was received on his son’s birthday from his grandparents to be invested into gold instead of Equity mutual fund looking at its current returns (we had already finished the paper work for mutual fund investment) . The investment is to be made for 16 yrs as his son would turn 18 by then.

It is quite obvious to get tempted towards the returns generated by gold in last 5 yrs against Sensex returns. Last few months have reported stellar performance by gold .

But if you go back to history , then one might think twice before entering into gold as an investment for long term .

The free trading of gold actually started in 1975 and it opened at $ 200 an ounce .But it had dropped to $ 100 an ounce in 1976 .Then gold had a dream bull run and it had gone up as high as $ 850 per ounce as US faced stiff inflation and people feared of collapse of US economy and its currency “$” ( Might be same thing which is happening currently).But the economy settled down and inflation eased out over a period of time . The gold came crashing down to $ 400 per ounce in 1990 and finally settled at $ 250 per ounce in 2000 before it entered into bull run again.

So effectively gold has delivered mere 2.63 % from 1980 to 2011 in dollar term if we take the latest trade at $ 1788 per ounce.

Now lets see in Rupee term . Gold was Rs 2000/- in year 1980 and today it is Rs 26000/- . The rise of 11. 5 times in last 30 years @ just 8.63 % p.a. Also major portion of rise is on the account of Rupee depreciation in dollar terms.

At the same time , the Sensex delivered 17 % p.a. returns ( Sensex level was 135 on 9th Aug 1980 and yesterday’s closing was 17131 ).

Current gold rally is mainly due to speculation of its price because of European debts , US economic data , volatile equity market both in US and emerging countries .Gold neither generates any interest income nor give any dividends and it does not have any major applications . If one wants to make money out of gold investments ,then one needs to understand the factors which drives it price and do an entry and exit at right time .

Hence accordingly to me ,Long term investors should  look at the Gold as a precious( and auspicious ) metal rather than precious investment in long term.

Your comments are welcome ……