The pros that support these thoughts are a downgrade of the US treasury bonds by the rating agency Standard and Poor’s. Apparently, with a weak economy, US Dollar is bound to lose its value over time; hence a rush to safe asset havens like gold by governments, banks, and individuals, all alike. Furthermore, gold has great demand for ornamental usage in countries like India. Industrial usage of gold includes electronics, computers, healthcare, glass making and in satellites where gold-coated mylar sheets are used to protect the satellites from solar radiation. The supply is limited where as the demand is ever increasing.
However, despite all these, investment in gold is not an ideal choice for a value investor! Why should you avoid investing in gold as a value investor?
The prime motive of a value investor is to buy anything worth $1 at 50 cents with the satisfaction of having found value for the money he earned hard. However, nobody is going to give you a gram of gold at half the market price or not even at a discounted price unless you buy it from a burglar! Then where do you find value for your money when buying gold?
The secondary aspect a value investor is concerned is to compound the capital and its returns. Gold never brings cash inflows for you to compound the returns. If you could compound your investment at a simple interest rate of 12%, your investment should double in eight years and four months. Gold having already appreciated six folds since 2003 from $10/gm to $60/gm, do you think any amount invested in gold will get at least doubled (100% appreciation or a mere single fold) in the next 8 years from what it is now? Seems to be a distant possibility and has to be seen. Furthermore, the pace at which gold appreciates daily that I feel it is purely speculative in nature and is moving into a dangerous bubble zone.
Physically, it is hard to store gold by yourself and to guard it from thieves. Even if wrapped in a protective cover, oxidation and discoloration could still happen and reduce its price. Okay, you have the option of electronic gold or gold ETFs, paper gold or gold certificates. Even for that, the issuing authority has to physically store gold before issuing you the certificates or demat credit, for which you have to incur the storage expense, insurance, and management fees apart from buying and selling commission and capital gains tax. Nothing comes for free.
Unless you hold gold in paper or electronic form, liquidating the physical gold has its own set of problems. Gold outlets are never interested in buying back the gold from you rather than selling. If at all, anybody who is willing to buy gold from you will not be interested in buying gold at the prevailing market price. A jeweler will be interested in just making you ornaments from your gold and returning it back for a fee rather than buying physical gold from you owing to the fear of it being stolen gold and legal tangles after that. Even if you intend to pledge it, with the fear of prices dwindling anytime in the recent future, the lender will be willing to lend only half the current market price.
Therefore, the only favorable point for investing in gold is diversification of assets as a crisis hedge if you prefer to do it and not even as an inflation hedge as the value of gold correlates with the value of money.
As Warren Buffett said, if you buy a cube of gold, you can stare at it, fondle it, or sit on it but cannot do anything to improve its value. You can buy gold on the presumption that some other greater fool than you would find value in it to buy it from you down the line!
Found this page useful? Tell your friends. Use the social share buttons below: