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Value Investing Myths

Investing in gold always pays off

Many Indians have a special liking for gold as an investment in spite of the dismal returns gold gives as compared to equities


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Investing in Gold Always Pays Off

There are scores of investors who think gold is a legitimate attractive investment. We show why it isn't.

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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 has 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 five years from that time and if it should be a part of investing? His response was: '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.'

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 ago.

We, at Value Research, present how gold would have fared if you had invested Rs 10,000 at various times in the past. Also, we compare how you would have fared if you had invested a similar amount in the Sensex at the same time. If you had invested Rs 10,000 in gold thirty years ago when it was trading at Rs 1,904 per 10 gm, you would have with you Rs 1.46 lakh in 2018. This pales in comparison to a similar investment in the Sensex, which would have netted you today a phenomenal Rs 8.30 lakh!

On the whole, the historical record of gold's performance with respect to the Sensex is very spotty. Buffett's advice of investing in wonderful companies and staying for long with them rather than putting your money in gold makes much more sense, especially after the yo-yoing price movement of gold in the recent time.

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