Thursday, August 29, 2013

Why Gold is almost always a good investment

Traditionally, Gold has always been considered a safe bet and a great investment option to rely on, in case of financial crisis. However, can it give you a combination of safety and returns better than most other investment and options that you are aware of? 
You will understand more once you realise the factors which have an influence on the Gold price.
Read on..

In 2013, we saw Gold prices fluctuate by around 35% globally and if you specifically talk of India, it was even more (around 50%) because of various other domestic factors which got superimposed over the global factors. 
Off late, Gold has again fluctuated a lot, but no one is noticing it. Between mid Jan 2016 to mid Feb 2016, we have seen the Gold price shooting up by almost 15% (in 1 month period). 
These fluctuations are not irrational. Let us get deeper into the causes of these fluctuations.

Gold in ETF (exchange traded fund) form is always a safe bet, and also capable of giving handsome returns if you understand how gold prices fluctuate in the market. Let us understand a few factors influencing Gold prices:

1) International Gold price
Whenever the gold market falls and approaches a level close to the cost of production of Gold, prices can rarely fall further because the producers would start reducing the supply, and therefore, Demand-Supply equation would typically balance it out. 

e.g. in July 2013, the international price of Gold bounced back from $ 1200 per ounce to $ 1360 per ounce in the 2 months. This was primarily because a lot of demand came in at $ 1200 per ounce. The reason for such demand was that the all inclusive average cost of Gold production was close to $ 1200.

This also makes Gold a much safer bet vis a vis equity based investments like stocks and mutual funds. While a stock (or a Mutual Fund) can go down to any value depending upon the company's earning potential, Gold will more likely hold on to its minimum production cost.



2) Currency Fluctuations / Other local factors
In 2013, the rupee depreciated sharply vis-a-vis the dollar. Whenever the rupee falls, the gold becomes costlier for Indian buyers since most of the Gold is imported in our country. In fact, India is the largest importer of Gold in the world.

Other than currency, there could be other local factors influencing Gold prices in a specific country. e.g. in India, the import duty on Gold was increased from 8% to 10% (to control imports and improve Current Account Deficit - CAD), thus making the Gold costlier for Indians.


3) Global Economy
Gold and Global economy usually go against each other. If people tend to lose confidence in the global economy, they tend to opt for a safe hedge like Gold. The vice versa is also equally true. 
In 2013, there was a dilution in US Fed stand to taper the Quantitative easing, thus surprising optimists of a global economy fight back, and hence international gold prices went up.
Sitting in Feb 2016, we see that the equity market has fallen 20% in the last 12 months, and Gold prices are up by more than 15% in last 2 months. 
There are many more such examples. This is not only a very interesting but also quite accurate correlation over the long term.


Long term outlook is strong
Gold fell from the peak of 2013 ($ 1700 per ounce) to $ 1200 per ounce and then recovered to $ 1360 per ounce later in the year. 
Gold has picked up from its rock bottom of $ 1050 per ounce in Dec 2015 to $ 1250  per ounce in Feb 2016. 
It will always recover back.
Considering the long term uncertainty in global economy, outlook for Gold is still positive and strong.


What should you do?
I have been advising the readers of my book (From the Rat Race to Financial Freedom) that around 7 to 10% of your portfolio must be in Gold ETFs. It will always continue to give you safe returns whenever the economy lacks confidence and also has a minimum support base, and will therefore is never likely go below that certain minimum value. 
Therefore, it is an ideal investment option which offers a great combination of safety and returns. It is also an excellent bet against inflation because the minimum cost of producing Gold keeps adjusting itself to the global inflation levels.


Cheers

Manoj Arora
elevate your life...

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4 comments:

  1. Excellent blog you’ve got here.. It’s difficult to find high-quality writing like yours nowadays. I really appreciate individuals like you! Take care!! You can visit this site. Kenmole

    ReplyDelete
  2. Gold will more likely hold on to its minimum production cost.

    How to know the minimum production cost is what at any day?

    Any source than plzz specify.
    Also tell how to look at it.

    ReplyDelete
    Replies
    1. Nowadays, Gold production cost is in the range of $1000 to $1200 per ounce depending on multiple factors and quality of Gold available across the world. It is unlikely to vary much, and definitely not on a daily basis. It may go up, in general, with inflation.
      However, remember that the production cost of Gold was close to $200-$300 per ounce just 10 years back. Even if you discount inflation for 10 years, it is still quite high now a days. One of the reasons is the inferior quality of gold that is extracted now a days, and hence lot of cost goes in purifying it.
      You can continue to look at Google once in a year to see if there has been a drastic change.

      Delete