Should you invest in Gold?

At Chrysalis, we like to maintain an ongoing dialogue with our clients on investment topics of interest to them.

The following was our response to a query received on April 16th when gold prices were in free fall:

It is a fact of life that an issue has two sides to it. Nothing in life is completely wrong or completely right.

But unfortunately if the right outweighs the wrong by even 60 to 40, then the result is usually 100 to 0. Because people have a herd mentality, especially when they do not have sufficient time to get to the heart of the issue and understand it completely.

Gold price today is $1350 per troy ounce. It cannot go below $1200 and remain there for a long time, because that is the cost of production right now. If it goes below $1200 then it becomes unprofitable to produce gold and hence production will stop, which in turn will cause supply to dry up and prices to stabilize. But if the seller is the American HNI then all this logic will not hold good-prices may simply come crashing down as they have in the past. He will sell it for whatever price he can get and move his wealth back to Mother Dollar. Because the value of private wealth in the US is over $30 trillion, whereas the value of private wealth in India is only $1 trillion. When American HNI’s decide in a hurry it is like a wild elephant running in the middle of "you know what".

World gold prices are determined by American HNI’s. When the US economy is doing well they sell gold and invest in stocks – so gold prices crash and stock market goes up. When the US economy is not doing well they sell stocks and buy gold- so stock prices go up and down (never crash and remain there, because equity is not a dead asset class. i.e., a good company’s management has the ability to improve profit growth through good management. So equity has the ability to create its own demand while gold does not due to its limited economic use as jewellery and that too majorly in India)

1990 TO 2000 US stock market

As you can see from chart in below link, the equity markets where rising consistently.
http://stockcharts.com/freecharts/historical/djia19802000.html
So gold prices went from Rs. 3200 in 1990 to Rs. 4400 in 2000, an annualised return of just 3.24%. The American HNI had moved his money away from gold to stocks!

2000 to 2010 US stock market

As you can see from chart in below link, the equity markets where going up and down but essentially remained in the same place as they were at the beginning.
http://stockcharts.com/freecharts/historical/djia2000.html
So gold prices went from Rs. 4400 in 2000 to Rs. 18000 in 2010, an annualised return of 15.13%. The American HNI had moved his money back to gold from stocks!

2010 to 2013 US stock market

As you can see from chart in below link, the equity markets are rising consistently.
http://stockcharts.com/freecharts/historical/djia2000.html
So gold prices went from Rs. 25000 in 2010 to Rs. 26440 in 2013, an annualised return of just 2.84%. The American HNI is moving his money away from gold back to stocks!

Let us say you do not do anything now and gold remains at $1300 per ounce for 3 years. The real loss will then be the approx $130 per ounce PER YEAR lost by not investing that money in an alternative asset like say bond MF. So while the value of the gold in your hand now remains at the same $1300 in 3 years time at 2016, but the value of an equal amount of $1300 invested in bond MF would have gone up to $1700. The real loss will be $400 or 10.25% per annum!

So to conclude, the author (for article below) has made a strong case while completely ignoring the facts. But you should think well and arrive at your own judgement. We should let the facts talk for themselves and ignore such noise that emanates daily from the print and TV media. If the US economy keeps doing well or even maintains its current performance (as expected) then there are some real losses to be made in gold over the next few years.