By R Jagannathan
The crash in global and domestic gold prices has brought out the bears in some numbers. So is it time to write off gold as an investment and safe haven?
It's worth listening first to some of the bears, who surely have a point right now.
Paul Krugman, writing in The New York Times, believes that "gold bugs" have been peddling unsustainable theories about the yellow metal as an infallible investment, and questions their underlying hypothesis. He writes: "...being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard, in which the value of the dollar was fixed in terms of gold and that was that. And both forms of goldbuggism soared after 2008."
Left unsaid is his belief that gold is coming down to earth like any other asset.
Swaminathan Anklesaria Aiyar, writing in The Times of India, says something more emphatic: "Sorry, but the party is over. The notion that gold is the finest investment, whose value can only go up, is dead wrong. History shows that gold fluctuates crazily, so it can look a fabulous investment for some time and then become a total disaster. There's nothing safe about it." (You can have a look at the accompanying chart from www.goldprice.org of the metal's performance over the last 30 years and judge is Aiyar is right or wrong).
Aiyar concludes: "Global trends suggest we have entered an era of falling or stagnant gold prices. Housewives and all other buyers beware: gold will probably be a lousy investment in the next decade."
The point, that gold investment may have been oversold by its backers is well taken. It is also fine to see the possibility of a gold bear market emerging in the next few years. But to assert that the story is over is a bit of a stretch.
Here's why the gold story can never really be over.
First, gold has a 4,000-year history. It has endured and maintained its value because its supply never rises suddenly, depending on someone's whims or fancies - like the supply of dollars by the US Fed, or the supply or shares by hundreds of companies, or the supply of mass produced goods. Gold will be there long after paper currency is history and replaced with private or digital currency.
Second, like every other asset - whether it is stocks or real estate or bonds or anything - gold prices too have their bull and bear phases. Asset prices rise and fall for three reasons: high liquidity, relative valuations of other assets, and fundamentals. The current fall in gold prices is not the result of any fundamental re-evaluation of its potential as money, but because investors are beginning to evaluate gold against other assets which may have been beaten down too much. This is also why crude oil is falling: speculators are rebalancing risks and rewards of various assets.
Third, the performance of gold should be assessed not in absolute terms, but relative terms. Bill Bonner, a gold buff if ever there was one, says that when stocks are assessed not in dollars but against gold the scenario looks different. The whole gold-stocks price equation went for a toss after the creation of the Federal Reserve, when money-creation took off.
Bonner writes: "For practically the entire 19th century... many years of the 20th century... and as recently as the 1980s, the ratio of the Dow to gold was 1 to 5 or less. Investors paid 5 ounces of gold to buy the Dow and its earnings."
Bonner is still bullish on this count and writes: "Will the Dow once again trade for 5 ounces of gold or less? Almost certainly. And it will probably happen before this historic drop in the Dow/gold ratio has reached its final bottom. Hold your gold. Sell your stocks."
However, the real point to note is this: despite the reality of bull and bear markets, the long-term trend in gold - especially in India - has been only upward.
This does not make a case for putting all your eggs in the gold basket, but certainly there is good reason to hold some of your nest eggs in gold. If gold prices are falling, it would thus be a time to accumulate cautiously. Gold is a sell only for speculators who have a short-term horizon. Otherwise, this is a good time to launch a SIP - systematic investment plan - in gold. As prices fall, you get to accumulate more gold.
This is precisely what every Indian family has been doing in the past without knowing the meaning of SIP. If gold were such a dud investment, they would have abandoned it long ago.
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Updated Date: Dec 21, 2014 02:09:38 IST