Gold: A Glimmer of Hope or Fool’s Paradise

It’s a general tendency to be temped to buy something that has more than quadrupled in past ten years. People around the world are chasing the gold glitters, as the prices are soaring higher. But, is it a bumpy ride, or there is something special about this yellow metal?

In the past decade stocks haven’t moved anywhere and the US dollar continued to lose value against almost every currency in the world. This is one of the major reasons why investors are readily buying gold at every level. Common masses are stashing gold in physical form; some are even taking their chances by converting all their savings into gold. What worse can you think of? Yes, they are burying it in their backyards.

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What people don’t understand is how an investment bubble can trap them? Take a look back and see what happened to tech bubble at the start of the millennium and then to the realty bubble very recently. Gold is no exception, it is rising in a similar fashion, and without a doubt I can say that the very basis of this rise seem flimsy.

Take a look at gold’s 10 year chart

As I promised in my last post, today I will share my thoughts on:-Why I feel Gold doesn’t deserve to be classified as an Investment.

Gold is purely a speculators play

Well, speculation driven purchases are made on the hope of selling higher, and believe me nothing else is factored in. Investment on the other hand is done with a purpose of generating income, and value appreciation in most cases such as real estate, bonds and stocks.

Most of you must have heard of Warren Buffett. His mentor and the father of Investment Profession, Ben Graham once gave an investment theory, “Greater Fool”, which I feel is apt one to refer to right now.

Just relate it to current trend in gold: – I know it’s foolish to pay such a high price for this investment, but I strongly believe that a greater fool is waiting to buy it from me at a much higher price. What if you are the last foolish one from the lot?

If you still don’t get it, let me put it straight. Gold does not generate income of any sort, it does not pay dividends and it won’t fetch you interest income and you obviously can’t rent it. Do you really want to take the risk of betting on this story, hoping that someone will readily buy it from you at a higher price than your purchase, and don’t forget the sale commissions and high deductions if it’s in ornamental form.

You can speculate if you wish to, if you completely understand the risks involved, but don’t confuse it with investing.

Don’t get swayed away by frothy gold

At present it might appear to you that gold is a store of value, but it’s not always like that. I researched through the web after seeing the gold chart from 1975 till date, and found that a similar phase went by in 1980, when puzzled by high inflation investors started pumping money into gold related investments. And, the end was not far, gold started to collapse in 1981 and this fall continued for two decades. By early 2000, gold had shred almost 70% of its market value. Even the current rally in gold that started in 2000 is building up froth on similar grounds, and all I can say is don’t bet with your money, the end to this story is very near.

How will fall in gold prices impact global economy?

What’s even more concerning is the fact that nowadays gold is being used more as an investment instrument, and its traditional use that of as jewelry is in a major decline in key regions such as India. Last time such a shift in use of gold was seen in 1980 and now you know what happened next.

Right now a crash in gold prices is very much predictable, but how it will pan out really depends upon government intervention, mainly US Federal Reserve and the Chinese Central Bank, as their policies can largely alter the course of this bubble.

A gold crash will bring a boom in developing markets

When investors fear the economic climate, they tend to switch towards precious commodities, which intern impacts the money flow that is required for growth in fast developing nations with ever-growing need for capital flows. Now, as and when gold bubble bursts, we will see an investment rush towards emerging markets. Although, it will worsen the inflationary environment, but with strict monetary policies these countries can very well utilize the money flow for economic development.

I do suspect a crash in gold prices in next few months, but I really don’t think it will be more than 30% initially. I have no idea what will happen to gold in the long run but right now it has surely reached the edge of the cliff. I know you traders are smart enough to position according to changing scenarios, but I am worried about common people who are speculating on gold rally, unaware of the kind of risk they are taking with their hard earned money.

Gold is not a real investment; you should systematically invest money in stocks, bonds, fixed deposits, and get yourself some insurance as well. Real estate is another good investment, don’t worry if you can’t afford one, you can always invest in mutual funds and ETF’s with real estate exposure. What more? One thing, don’t lay all your eggs in one nest, diversify as much as you can, and make sure you make reliable investments.

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