Is Gold Good Investment?
Posted May 14, 2009on:
Since 2001 gold has been an attractive investment with an yield higher than on many other assets. That yield came from the price of gold which has consistently risen in the past eight years.
In the Indian market, the price of gold had shot up from Rs.1,180 per gram to Rs.1,470 in the last one year though the international price of gold was more or less stable. Gold became more costly in India only because the rupee depreciated against the dollar.
Gold has been a traditional form of investment apart from being a favorite gift at marriages and festivals. That is because, earlier, there were no alternative assets, except land, to invest in and, unlike land, gold was the most liquid asset with a ready market at all times and in all places.
Even today, when there are good alternative assets available, gold continues to attract a good deal of investment. Gold imports have been in the range of 400 to 800 tons per year and the total stocks of gold in India have exceeded 13,000 tons. That makes India the largest buyer of gold in the international market. The demand for gold this year has however been down partly because the price of gold has been high.
The price of gold has gone through long cycles. It touched $ 850 an ounce in 1965 and thereafter suffered a long bear spell. By the end of the nineties gold was down to $300. Since 2001 gold regained its place in asset portfolio of institutions and individuals as its price began to shoot up. In the last eight years prices trebled.
Will gold continue to be a good investment? Not in the short run. For, the bullion market is likely to be over-supplied with gold.
IMF will release 403 tons of gold to raise money to counter recession by investing in affected developing countries. China, which is holding huge reserves of gold, is also likely to go to the market to sell. Besides, the demand for gold for jewellery is declining. As such, in the next year or two the price of gold is likely to be steady or even decline.
Investors’ will be looking for other options. Bank deposits may not be as attractive because the interest rates are now down to 7.5 per cent. The market for equity has been improving because of better risk appetite on the part of investors and, before the end of the year, is likely to be on the upswing. That will divert investment from gold to securities which will earn a better return.
In the longer run it may be a different story. Production of gold has been declining with the maturing of gold mines. Worse still, hardly any new sources of gold have been discovered. Hence gold supply will shrink and prices over time will rise to make gold a good investment though not better than equity.
Thomson Reuters 2009 All rights reserved