Over the last year or so, the Gold problem has become ever more serious for investors. What's the problem, you might ask? Gold has given such wonderful returns for years now so how can that be a problem? That's the problem. It's increasingly hard to believe that the gold story can continue in any sustainable, long-term (or even medium-term) fashion. If you'd like to understand why, then the best thing to do is to google an article called 'Why stocks beat gold and bonds' that Warren Buffett wrote last week.
Buffett explains in eloquent terms that Gold belongs to a class of investments that will never produce anything, but whose growing value depends entirely on the belief that someone else will pay more for it eventually. The value of gold has been driven by the fear that other asset classes will lose value and this has driven up the relative value of gold. The only thing that motivates gold investors is that in the future, investors will grow more and more fearful in this manner. As more and more investors come to believe this, their increasing belief appears to confirm the truth of the belief itself for a while. Eventually, the bubble bursts at some point when the supply eventually exceeds the rate at which the belief is growing.
As Buffett points out, in gold's case, there's the additional problem of supply. At current prices, the world produces 168 billion US dollars of gold every year. Not just that, it is in the interest of the producers to dig up as much of the stuff as possible while prices are high and rising. The continued rise of gold would require at least that much fresh money flowing into gold investment every year. That's a pretty large inflow that will have to be kept up if prices are to sustain. It's true that Indians are at the forefront of the efforts to sustain this. We appear to absorb an amazing 30 per cent of fresh production every year, and thereby do huge damage to the country's current account balance.
However, it's time that everyone who is buying gold (for long-term, commodity traders are a different category) should examine what their motivations are and what they should do about it. In India, there's one motivation that stands apart and that's the socio-cultural need to save for gold for weddings etc. This is the only use for gold where it doesn't actually matter whether the bubble will deflate or not since the goal is to have a targeted quantity of the physical stuff rather than to look for an exit price. Without commenting on the logic of this, one can see that it probably makes sense to consider doing this through a gold fund or a gold ETF now. One can buy safely and gradually in small quantities and then materialise it when needed in whatever way one wants.
Beyond short-term speculation and the physical requirement, it's hard to believe that there is much logic in thinking of gold for long-term investment, as Buffett's logic makes it clear. The problem with gold today is that we are mixing up traditional ideas of gold as a hedge against bad times with the modern reality of gold as a speculative financial investment. Gradually, over the last two decades gold the tradability and liquidity of gold in a paper, financialised form has completely overtaken everything else. This is not the gold of old but yet another line on a chart which moves up and down based on liquidity flows and the story of the day. However, that's not the kind of thing that should interest someone who is trying to put away their savings for the long-term. The long bull-run not withstanding, investors would do well to not think of think of gold as a productive type of asset that is meant to get returns over years or decades.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
