Is Gold an Investment?

My dear readers, It saddens me deeply to announce that: GOLD IS NOT AN

INVESTMENT!! I know, you don’t want to believe it because only yesterday your
neighbor was telling you about how 10 years ago gold was x/tola and now it is
10 times that money. Why then would you believe me? Who am I after all to
suggest such a thing to you? My request to you is simply to read on and judge for
yourself. Oh, and please let us know whether we were able to convince you to
never buy gold as an ‘Investment’ or not! Leave comments below.

Value of Gold?
When we say Gold is valuable, what do we mean by ‘Value’?. Well, ‘Value’ can be
broken down in two parts. Firstly, the ‘Use Value’ of anything can be found out by
applying a simple test. Imagine that if the government bans the sale and
purchase of Gold from this moment, Would Gold still be as valuable? No !,
because there’s no buyer and no seller. However, if we were to apply the same
test to Steel, for instance, we can rightly imagine that it’ll be impossible for the
world to function without it. From cars, to kitchen, to buildings to you-name-
whatever-it-is, Steel is used everywhere, and banning it would mean the collapse
of this civilization. Hence, we can say that steel has ‘Usage’ value while Gold has
none.

‘Perception’ value on the other hand is slightly more challenging to assess, since
it is mainly derived from how a certain object is perceived. Gold, in India, is
synonymous with social status and wealth and for this reason wearing gold at
weddings and boasting about it is a common practice. But this pleasure causes a
serious damage to the economy as a whole, which is that we, as a country, import
the largest quantity of the yellow metal in the world and as a consequence most
of the country’s wealth is locked in a dead asset (one that doesn’t put money in
your pocket regularly). Had this amount been invested into productive assets
such as stocks, India wouldn’t have to ask for foreign investments to the scale it’s
having to do so. Lack of retail investors (You & me) leaves the government with
no choice but to make huge borrowings from countries such as China, Russia,
and Japan, which will also reap the benefit of returns.

Some number concerning Gold.

Foreign Exchange 1 is yet another aspect of buying Gold that often bypasses our
view when considering Gold as an investment. We can guarantee these figures
will shatter the illusion you have about the GOLD until now:
 1980 2015 CAGR*
GOLD $ 820 $ 1117 0.88%
(Price/oz)
$
GOLD ₹5000 ₹71488 7.89%
(Price/oz)
₹
SENSEX 100 28020 17.47%

CAGR*: Is the Compounded annual Growth rate, or the rate by which you money or
investment grows on an yearly basis. Note that it is different from Simple Interest in that
rate is calculated on the same principal amount year after, while in Compound interest
rate is calculated on Principal+interest for previous year .

Something unusual is happening here. In $ terms, the price/oz went from $820
to $1117 in 35 years. But surprisingly, in ₹ terms it jumped from ₹5000 to
₹71488. Why such a striking difference? You see in 1980, 1$= ₹10 but by
2015 $1=₹64. Meaning that the big jump in prices of gold that we’ve seen in
the past is because the $ became 6.4 times stronger in the past 35 years or
because ₹ has become weaker by 6.4 times. What this simply means is that we
can buy less for a ₹1 today than we could’ve 35 years ago. Remember how your
Grandmother always says ‘Oh we used to buy a kilo of rice for ₹5 in our time!’,
remember that one? Yeah, I’m sure you do. So it brings us to the uncomfortable
truth that you wouldn’t like to hear, which is that Gold isn’t an investment at
all!! In fact, it’s so bad that you could’ve earned 17 times your money just by
keeping it in the bank itself and a whopping 24 times your money in the stock
market. Moreover, while Gold rose by 0.88%, money in the Bank and Sensex
rose by 10% (approx.) and 17.47% annually.

A sum of ₹10,000 used to buy gold @0.887% resulted in a sum of ₹13,631 in 35

years, while the same sum of ₹10,000 kept in the bank totaled ₹172,413.472.
Now dare to imagine what ₹10,000 would amount to at 17% (SENSEX CAGR for
last 35 years)-- ₹2,435,034.74 (24.3 lac). So next time you’re willing to ‘invest’
in Gold, think again! And then think again until you’ve successfully talked
yourself out of it.

The Author is an employee at EIFS, a company dedicated to

spreading FINANCIAL LITERACY by conducting regular seminars.
To become more financial literate register for our next seminar at
http://eifs.in/register/flap or to find out more about us, visit
http://eifs.in .We urge you to think differently and give you the
knowledge of evaluating different asset classes (GOLD, PROPERTY,
SHARES etc) and figure out which one is attractive at a given time.
What’s more is that it’s really easy to learn too. Hope to see you at
our FREE seminar.
1. https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765 (A rate
of 10% has been assumed since in 1980 since 10% was the ROR on
deposits> 5 year terms at the time)
2. The amount is compounded annually according to key deposit rates for
term deposits>5 years. The data can be viewed by visiting
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=12765