Wednesday, October 20, 2010


Gold is powerful asset from time immemorial. Even the world’s monetary system revolves around the Gold. The Gold standard has been the key for devising the monetary system of the world. The currency of individual country revolves around the Gold Standard. Yet Gold is not the best asset class though generally it is considered as the safe bet. In last 20 years the best asset class has been art forms and equity ranks next to it. In effect the gold is below equity next only to real estate. However, the Gold ETF had occupies a position higher than equity in last three years. But we need to keep it in mind that long term the position of Gold ETF would be behind Equity only.

Gold prices today seem unstoppable. They’ve reached levels that would have been unimaginable a few years ago and gold cheerleaders say they are on their way to levels that are unimaginable today.

When investors go and look for information on whether gold is still a good bet, there are experts who loudly proclaim that Gold is the only commodity which will save the financial crisis of the world. They recommend buying of Gold ETF or Gold ornaments so that during the financial deluge they would survive better than their neighbours. Many experts do advocate well-reasoned arguments supporting as to why the yellow metal prices would continue to move northwards. Gold is generally accepted by all. Hence demad of Gold is unending. There are shortages of Gold in the market and demand moves up as more and more countries would like to hoard it. There are many variations to these arguments, but basically, they all boil down to the age old theory of ‘safe haven’ t, viz. that investors are scared of the bleak future of stocks, bonds, currencies and all other kinds of financial investment. They are absolutely scared that there would be another financial crisis. To survive such financial catastrophe it would be desirable to act smart now itself and need to rush in to acquire an asset type that has a historical reputation of crating and protecting wealth in worst times.

Now a days it is not just the financial experts, but even the print and electronic media also carries stories and articles recommending gold as a significant chunk of the individual’s investment portfolio. They now days declared that the time has arrived when Gold needs to be considered as the savior during financial disaster. According to those experts days of Gold as a mainstream financial investment, have arrived .But we do not think so. We would like to forewarn our readers that gold is of course a valuable metal but cannot be considered as the savior of life during financial deluge. Or is it a hype only ? Will gold live up to the hype created by some of the fiscal experts? I do not think so .According Dhirendra Kumar, an honest and sincere expert on the field “the hype has now reached impressive levels. On the internet, it’s not difficult to find apparently sane analysts who say that gold could rise to four times today’s price in five years.” But does he believe it? I do not I am sure Dhirendra Kumar too does not believe.

Projections of two to three times today’s price levels in a year or two are commonplace. Is this a bubble? The gold of today is not the gold of old — a largely physical asset that was a safe haven in troubled times. The has turned into a commodity and is a paper asset too, with highly liquid and highly leveraged markets where derived proxies of gold trade in much larger quantities than any underlying demand. This bubble is likely to burst as was the case of Liquid Black Gold. The crude oil also crated a bubble few years back. Over the past few years, oil, copper, nickel, wheat took its turn in creating buble.We think this the turn of yellow metal to create bubble. We need to be aware of such a situation and try to salvage our own position before the Gold bubble is burst.

One Financial experts did say “in fact, gold is even more of a bubble because it is an inherently useless material, earning no dividends or interest. There’s no industrial consumption story like copper or nickel here, and unlike oil, there isn’t any danger of ‘peak gold’ laying waste to the world economy. Gold is the purest of all bubbles—where even the story being told by its proponents is that they expect its price to rise because everyone expects it to rise”. We do believe that Gold is valuable metal but do not believe that Gold can act the savior of humanity. It has never saved humanity during even great depression it would not save even now. Yes we can buy Gold metal for our ceremonies of future . We can at best invest in Gold surely only up to 10 percent of our total investing asset.

Of course the present bubble will continue, and brave persons can find this opportunity to milk yellow cow for all it is worth. Bubbles are, by definition, irrational and emotional. Due to psychological effect and due to trick of the traders gold’s price might go up phenomenally within a few years. But It is not worth taking the risk unless you are either fool or too intelligent to exit just before the bubble is burst. A few readers asked us whether it is worth taking the risk? My reply would be similar to an up country Economist who said “ if you invest in it today, have no illusions that you are putting away money for a rainy day”. Buying Gold more than your own needs would be actually a speculation. The buying of the yellow metal in large volume is only a madness of th4 market. And this madness may continue for a while. A day is not far off when this madness will end suddenly, and then the experts on yellow metal shall have to run away never to return back to the market. Our advice to our readers are be vigilant invest in Gold in moderation. It is a valuable product but it would neither make you super rich nor support you as the savior during financial deluge. Your portfolio should surely consist of Gold and Gold ETF but not more than 10% to 15% of your total asset.


1 comment:

Ysabella said...

Although gold is something that some individuals want to own, there are those who have this thinking that gold is their security blanket. However, to Buy Gold Assets has to be at the right time. Investors know that they have to make the right decision when to buy so that their purchase is worth it.