Do the war and the sanctions imply that you should invest more in gold? That's the logic that is heard more and more.
01-Jun-2023 •Dhirendra Kumar
In conversations about investing, both public and private, gold goes in and out of fashion as its price goes up or down. Depending on the starting and ending points of the time frame you choose, you can show gold to be either good or bad as an investment. However, if you look at a long enough period, only one conclusion is possible.
Over long periods, rising gold prices give an illusion that the returns are good. Consider a span of approximately 40 years, from 1981 until the present. In this duration, the price of gold has experienced a 33-fold rise, moving from Rs 1,800 per 10 grams to nearly Rs 60,000. This is an impressive appreciation. However, if you contrast this with the performance of the Sensex in the same period, the perspective changes significantly. The Sensex, starting from 173 points, has catapulted to 62,500 points, marking a remarkable 361-fold increase. Therefore, while the ascent in gold prices is noteworthy, it's dwarfed by the exponential returns from equity investment prices over these four-plus decades.
However, on gold, the media/online narrative has changed the story somewhat. As we all know, in early 2022, the United States and its cronies decided to confiscate the Russian Central Bank's assets deposited in Western banks. Whatever impact this had on the Russian economy is not my topic today. Still, it did make everyone else in the world realise that it was now risky to keep national reserves in dollars in banks controlled by Western governments. Since then, practically every central bank in the world has started shifting assets held in national reserves from dollars to physical gold, with the Chinese taking the lead, predictably. Of course, this shift cannot be rapid because that itself will destroy the value you hold, but the trend's direction seems clear at this point.
My question for the day has nothing to do with geopolitics. Instead, I'm looking at all the advice floating around, which says that because of this turn that geopolitics has taken, you and I should invest in gold and continue investing in it for a long time. Does this make sense to you? To answer that question, let's see why people and countries buy gold. Gold can be an investment, that is, bought for the appreciation of its value. As I've shown above, its performance over time is quite poor for a volatile asset.
However, you will also hear it being said that gold is a 'store of value'. To understand this, I will amend that statement to 'Gold is a store of value that is independent of any monetary, fiscal or legal system.' That's why countries keep it in reserve and are now keeping more and more of it. Unlike US Govt bonds, it's a store of value in your national reserves that cannot be arbitrarily confiscated. For this purpose, central banks will hold gold without regard to its performance as an investment. They want a store of value that the US government cannot destroy. Even if gold falls 20 per cent, that's still better than the zero to which Russia's deposits in Western banks have fallen.
The question is, are you, as an individual, in the same situation? Well, maybe some of you are. For the last few days, the grapevine says that you can buy any quantity of gold with Rs 2,000 notes, no questions asked if you pay a rate of around Rs 72,000 per 10 grams. That's for people who, like the world's central banks, need a store of value independent of any monetary, fiscal or legal system. However, for most of us, that sort of store of value is not needed. We need our savings and investments to grow healthy and generate wealth that can be legally used.
Despite all kinds of global economic and geopolitical upheavals in the last few decades, gold's long-term performance is so poor that despite whatever boost it will get from geopolitics, it will remain a bad investment. Undeniably, gold has a long history of being a stable store of value. It has an equally long history of being a poor investment. Take your call based on what your needs are.
Suggested read: The gold glow may fade in the long run