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Does investing in gold always pay off?

You may be attracted to gold, but is investing in it a good idea? Let's hear what investment guru Warren Buffet has to say

Does investing in gold always pay off?

Gold has been the hot thing to own since time immemorial. The attractiveness of the yellow metal is not likely to go down any time soon. Scores of investors think gold is an attractive investment. We explain to you why it isn't.

Busting the Myth
Let's begin by quoting one of Buffett's most famous quips on gold: "Gold has done very badly [as an investment] in the past and I see no reason why it will work well in the future. All that happens is that it is taken out of the ground in South Africa and put back in the ground in Fort Knox." (Berkshire Annual Meeting, 2005).

The run-up in gold prices has caused many to pause and think about the long-term gains we could have if we invest in gold. Buffett shows the folly of this train of thought. "Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two than they are now. And if they become more afraid, you make money, if they become less afraid you lose money, but gold itself doesn't produce anything." (CNBC Interview, 2011).

Again in his shareholder letter of 2011, Buffett reiterated, "What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth - for a while." Just after the financial crisis had made its impact, Buffett was asked in a CNBC interview in 2009 where he saw gold 5 years out and should it be a part of investing? His response, "I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot - and it's a lot - it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."

According to American market tracker website, marketwatch.com, gold has gained 45 per cent since that interview (till April this year). Coke is up 100 per cent and Wells Fargo is up 200 per cent. This excluding dividends!

Indian Context: Gold has a mythical hold over the Indian mind. We have grown up seeing our mothers treasure the precious metal and more recently heard tales of how cheap it was only 20-30 years back. The run-up in gold prices over the last couple of years has solidified the belief that gold stands as a solid long-term investment candidate.

We at Value Research present how gold would have fared if you would have invested R 10,000 at various times in the past. Also, we compare how you would have fared if you would have invested a similar amount in the Sensex at the same times. If you would have invested in Gold thirty years ago when it was trading at R 1,800 per 10 gms, you would have with you R 15.55 lakh today. Exceptional, but it pales when you compare what a similar investment in Sensex would have netted you today - a phenomenal R 76.41 lakh! On the whole, the historical record of gold's outperformance with respect to the Sensex is very spotty. Buffett's advice to invest in wonderful companies and stay long with them rather than putting your money in gold makes much more sense after the yo-yoing price movement of gold in recent days.
This is tenth of the 11 investing myths we have been talking about. Please click here to know about the other myths.

This article was first published on August 2013.