Gold is a fascinating investment. Sceptics in gold missed the run-up of the last 10 years or more. Late believers got in nearly at the peak. However, whenever one got in, Indian investors seem to have been rescued by the Indian rupee. And unlike stocks, no one believes that gold can go to zero (like some vanishing companies). It is reported that the cost of mining an ounce of gold is close to $1,100, so that kind of sets a floor on gold. Of course, the caveat is that someone out there still likes gold.
Gold is unlikely to go out of fashion. Financial crises in the world seem to be as regular as day and night. There is no faith in any single currency, whether it is the dollar or the euro or the yen or the pound.
So long as the Indian rupee keeps depreciating, there is a natural hedge to gold. And there is also a base price below which perhaps gold prices would not fall. If we assume that to be $1100, the potential for downside in gold is around 12 to 15 per cent in dollar terms. However, I will justify why gold prices will not fall below the marginal cost of mining.
Gold may not give me returns. The last 12 years or so were spectacular. However, if I am simply looking at salting away some wealth, I should really be comparing gold with PSU bank deposits. Both are safe (assuming that government will never let the PSU banks go bust), with respect to principal. Gold will earn nothing. A bank deposit will give me some interest each day it sits in the bank. The argument against gold is that there is not going to be any global currency failure. In fact, when concepts like Bitcoin are getting popular, who will want to go back to the gold standard?
But, how much gold should one have?
I have seen that the poorer the Indian, the higher is the percentage of his/her wealth in gold. Even the poorest of the poor have some gold. From a view point of someone who has disposable income and wants to keep his money safe and earning, gold is not a great option. I would perhaps given in to temptation and allocate not more than 10 per cent of my money to gold.
Buying gold in India has another disadvantage. There is an element of tariff that makes gold pricier than the global price. So if we were to take it abroad and sell it, we are not going to get the tariff that we paid out here. Maybe if you are an NRI, you could buy gold, in electronic form though I suspect Indians have a fetish for the physical form.
(The writer is an independent analyst and can be contacted at balakrishnanr @gmail.com)