Gold go slow now

Gold has again started creating buzz as it reached near all time high of Rs 29,516 per 10 grams. Everybody who said you to buy gold will again be saying look I said you. The rising level of uproar about gold breaking records at the same time thoughts of stalwarts like Warren buffet that gold has no value might be creating lot of confusion for many investors.

As far as India is concerned, Gold has always had a significant importance in our culture. One cannot imagine wedding without gold jewellery in India. On every traditional occasion in India, Gold is a must. Indian culture provokes investment in Gold in phased manner like Makar sankranti, Gudhi padwa, Akshay Tritiya, Guru Pushyamrut.  So if we really see, house makers, who have been religiously following accumulation of gold without looking at price on these occasions, have turned out to be the best wealth creators as compared to their husbands who have been actively trying to create wealth through various options.

Gold as an asset class gives lot of comfort to Indians. They do not mind its value going down; in fact the price correction in case of gold has always been sought as an opportunity to buy more and more gold. The comfort was always there as the asset class always was bought with motive of only holding and never with the motive of profit booking. The scenario now has changed a lot, with many options available to speculate gold prices now, many are investing with small time horizons.

Reason to speculate is very easy, since last 6 years the gold has created wealth at abnormal rate of return of greater than 20% year on year. No asset class has really come near gold. In fact 2010 to 2011 return was bumper 43% (on calendar year closing basis). For an asset class theoretically expected to beat inflation, these kinds of super normal returns are exceptional.  Just for the amusement purpose let me divulge interesting details. 10 gram of gold in 1950 cost Rs 99, in 1970 Rs 185, in 1990 Rs 3200, in 2010 Rs 18,500 & now its again creating new tops, on back ground of, US GDP slow down, dollar weakening & what not at Rs 29,400.

So the above data clearly makes a good case to invest in gold no second thoughts. But let’s think this way, would you buy any commodity, stock or any other tradable thing which has consistently for some period of time has crossed its long term average rate of return. Let me make it simple,  Stock A has long term average rate of return 10% and since last 5 years it has given 20% return and nothing fundamentally changed. This will make me concerned. I will call it either overpriced or over bought.

The 2008 crisis, slowdown fears, Europe crisis all lead to a rise in price of gold due to uncertainty. These things were unknown and many large investors went in for gold, then, straight away. These are the realities today, certainly gold will also show some volatility but I don’t feel now these known uncertainties decide the gold price route.

Then you may say, its after all gold, it has always given positive returns only. See the fact is, long term return on gold has been positive only. It’s the same case for all asset classes be it sensex or real estate in that case.

Let me make a case for you, somebody who invested in gold in 1993 to 2001 had a single digit returns till 2005 which did not beat inflation as well. 1976 to 1981 gold had phenomenal run similar to today’s scenario. Gold from Rs 432 Reached Rs 1800 in a matter of 5 years. Compounded return of 33%.  Thereafter had a mixed bag returns.  Statistically if I have to study, on data for last 88 years, average time taken by gold to double has been 9 years. There have been scenarios where it has taken 4 years to double as well as in some scenarios 17 years.  If I consider average period where most of the investors will be lying, the return is 8% p.a. compounded.  The long term average return is not more than 8% on gold.

Recent run up in gold run seems to suggest that gold uptrend may halt now. Expectation of gold price coming down is very low but expecting a similar run up in the gold for next 3 to 5 years may lead to disappointment. Gold as an asset class has to be part of the asset allocation in reasonable manner. Accumulating gold for consumption (marriage and jwellery requirement) purpose should not stop. One should look at accumulating gold through SIP format , NSEL has come out with very good and innovative concept of dematerialized gold, e – Gold, which is very cost efficient and easy , one can also accumulate  through ETFs.

The economical scenario across the globe makes gold a most desirable commodity, if hell breaks loose and Europe just falls, then, certainly gold will climb the new highs. The probability of this happening is very low, nevertheless gold will certainly show the volatility in near term.  Gold has always acted as the best reservoir of wealth and so it needs to be part of your asset allocation.

Accumulate gold through SIPs, buy on dips, don’t rush. Allocate reasonable proportion to gold and don’t do unreasonable gold buying. Don’t wait to buy gold for consumption and keep on accumulating through SIPs.