Buying a gold bar is an investment. Buying jewellery is a symbol or a fashion statement. Don't mix the two
04-Dec-2006 •Dhirendra Kumar
If you want to advertise an investment-related website on a major Internet-based advertising network (that of Google, for example), it will cost substantially less to advertise a mutual fund or stock research website than it will for a site on investing in gold.
Since the pricing for Google's advertising network is, in effect, an auction, this difference evidently means that people who are running websites about gold investing are getting much more return on their advertising expenditure than those who are running mutual funds or stock websites.
Does this tempt me to transform ValueResearchOnline.com from a mutual fund site to a gold site? Not quite, but it does make one wonder how much sense gold makes as an investment and how exactly one should invest in it. As far as the websites that are advertised online go, an amazingly high proportion of them are clearly fraudulent because they actually seem to be promoting the stocks of companies that supposedly own gold mines that are about to come good.
Closer home, Indians are apparently buying gold in unprecedented quantities. A recent newspaper report said that Indians buy 1,918 kilos of gold every day. That's an expenditure of Rs 179 crore every day which I am guessing that almost all of it is in the form of ornaments worn by people.
I'm making this distinction because I once met a jeweller, one of the bigger ones in Delhi, who told me that at least a tenth of his sales were for ornaments that were meant to be put on temple statues, both private and public.
Does it make sense to look at gold as an investment? If you look at historical gold prices over the last 70-80 years, then it does make sense to think of gold as a good asset type in which to put some proportion of your savings. Apart from an anomalous period during the late nineties, Gold has yielded around 8-10 per cent a year over most of period since around 1920. And interestingly, the common belief that gold does better during times of economic and political distress has also held true. During these years, high jumps in gold prices have occurred during the 1940s and the 1970s, both periods of greater turmoil than normal. For example, from 1965 to 1980, gold sustained an increase of 21 per cent a year, more than keeping pace with the high inflation of the times.
By this measure, what is happening now is quite odd. The boiling over of gold prices that has happened over the last five years doesn't fit into any earlier pattern. However, when one takes a longer view, it is clear that holding five or ten per cent of one's assets as gold can't be too bad an idea.
What is bad is doing what most seem to be doing in the name of investing for gold. We have this idea that gold is a good investment for bad times and then instead of buying gold, we buy jewellery. But there's a problem. Jewellery is not gold, at least it's not the kind of gold that can be considered an investment. If you want to buy gold as an investment, then you must buy it a form in which it can reliably yield back its real value without any problems anywhere, after any period. The only form of gold that satisfies this requirement is investment grade gold bars or coins. This kind of gold is actually sold by many banks and comes with all the proof that you need to know that you are buying gold that is actually gold.