There are many reasons to buy Gold and hold it. Gold as a hedge in your portfolio works, but works only over a long period of time. If you buy gold because it has been going up, it would be a wrong reason to buy. However, the fact is, it may still go up – but don't expect to get 36 per cent Compound Annual Growth Rate (CAGR), that will not happen, for sure.
There are also many reasons why you shouldn't hold gold. One reason not to own gold is the recent phenomenon in its price. For example if you had invested in gold in 1980 (USD 590) now it would be worth about USD 1055! Not much if you consider inflation, is it? As against the Sensex which has gone from 100 to about 17,100. And the shares would have paid you nice dividends for holding the shares!
That said, here are 13 reasons why it's a good idea to own gold:
- Global currencies are at an imbalance USD is not the only currency which is in bad shape. In fact, most currencies are at quite an imbalance with each other. So if you do not know whether to hold your money in rupees, lira, yen, dollar, euro or pounds; choose gold. So, clearly as much of cash you will keep in your portfolio is the amount of gold you should be having.
- Investment demand for gold is accelerating Yes, many people are touting this as a great hedge. They prove this by checking the trend for a period of three years. Fantastic! But if you check the trend for over a 10 year period, it will fail and fail miserably. What is surprising is that bank relationship managers are now selling gold mutual funds – they will keep selling to keep their jobs. These mutual funds will keep buying gold. So, it is a self fulfilling prophesies.
- Printing currencies Ben Bernanke is converting all the forest in the US into currency! Most Central Bank heads are printing too much currency ever since the gold system failed. Thankfully, they cannot create gold.
- Huge supply and demand gap India and China will continue to buy gold, as will many other users!
- Declining interest rates Interest rates are more likely to decline, than rise, internationally, adjusted to inflation.
- Decreasing gold production According to one expert I was speaking to, the total world gold production is decreasing. I was surprised! Increasing selling prices make it attractive to search, so production should increase. This is what happens in theory, but it is getting to be more difficult to prospect, mine and produce gold.
- 10-year long gestation period The gestation period even for gold which is spotted is quite long. According to some experts it is as high as 10 years. So, gold mining companies prices go up over long periods and in a lumpy kind of a fashion. If gold is found, prices go up. If mining starts, prices go up. If production starts, prices go up. So be careful while buying a share of a gold mining company.
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- In China, it is safer to keep money's worth in gold? Chinese demand is likely to go through the roof. Very few people understand the Chinese economy. If the populace does not trust its currency, they are likely to keep their money in gold! The Chinese government had banned the population from owning gold for a very long time. Obviously, once the ban is lifted, buying will start. It may take 2 to 4 years by which time the retail network to sell gold to the whole Chinese population is set up. Once it is set up, prices will boom.
- Demand in India Indian demand is difficult to predict. However, there is some talk of jewelers suicide in Kerala (with prices rising, consumption is going down, so shopkeepers are dying). However there is a huge ‘wannabe’ population which will keep buying and chase prices! Be that as it may, selling may not be enough to exceed demand - another cause for prices to go up.
- Investment demand is high All fresh bankers are busy selling gold mutual funds. This is a funny situation where the price is going up because the fund is buying. People are buying gold ETF / regular funds which is causing gold prices to go up! Case of tiger chasing its tail.
- Governments attitude towards gold can be foolish and slow The rich countries which have a lot of gold (including IMF) have a pact wherein they will not sell more than 400 tonnes a year (not sure about the figure, but it is right there somewhere). This will restrict supply on the one hand, but mutual fund demand will drive the prices.
- Currently it is tied to the USD Nobody in the world knows how the decoupling between the Chinese currency, dollar and the gold will happen. It will gain against other currencies - this will hurt the dollar. At some stage it will break off from the currencies and go on a secular bull run, and the trade will be guaranteed by BIS.
- Banks are pushing gold! Bank relationship managers are pushing gold mutual funds, websites are screaming that gold is a good buy, people without understanding of interest, compounding, etc. think this is a great ideal This almost blind and noisy screaming will push prices high. Most fund managers are buying with a vengeance!
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