Everybody and his brother appears bullish on the yellow metal. So while people justify their investments in gold as a flight to safety the point is nobody is buying gold for safety as much for returns. It is ironic that everyone is buying gold because his neighbor is running for safety. The common theme running around is �What if the Chinese stop buying US Treasuries and switch to Gold?� So there is a sort of front running if you might call it so. The theory that the price of one ounce of Gold being equal to the Dow Jones index seems to be the most vehement voice in town. This ratio was reached in 1932 and also in 1980. The proponents of this theory are the same who made the world go crazy with crude earlier last year and with a host of other base metals. How many people know about the theory of no new oil fields being discovered since the past 40 years yet the black gold fell 70% from the top! These experts are now experimenting their dart throwing skills with the yellow metal or as you would call it the pride of the Indian bride! Every week some pink paper reports on how people are standing in a queue to sell off their gold jewellery and yet there is no relenting the yellow metal continues to move up and beyond, academicians opine that the new dollars that the US is printing will chase some open ended dream so while it was technology in 1997-2000; emerging markets in 2003-07; Crude and other metals between 2006-08; it would be gold at this moment. After all the greenback has to chase some underowed asset! But with about 15,000 tons of Gold Indians own more then double the gold assets of the Federal Reserve and probably there are huge amounts of unaccounted gold in Now the targets for the yellow metal have been flying around at US$ 3000 plus over the next few years. My argument is that whatever happens to gold will happen very quickly and suddenly. Gold has become a fear asset and fear assets rise as strongly as equities fall with fear so if Gold has to be a three bagger from here we will get there sooner then we expect. Also we cannot have a situation where Gold reaches that level and The US has come out of recession because in that case there would be no fear so the gold rally has to terminate before the As Indians we should take this opportunity to sell out the family gold and silver whenever we get to that opportunity because even if we were to invest into a 10% yielding asset the interest earning asset will more then make up for the price of gold over the next few years. Now if gold reaches US dollar 3000+ then the US dollar would depreciate in value the two assets cannot be positively correlated for longer periods of time so even while gold advances in dollar terms the rise could actually be less in rupee terms. On the other hand if Gold grows at a rate faster then the rate of growth in business then all businesses will close down their factories and offices. These will be sold off and the proceeds invested in Gold assets. Also Gold as an asset class has no underlying value other then that it is scarce and is considered as a perceived value. So we can dance at the party but unlike Cinderella we should know when the clock strikes 12.00! That is because Gold takes several decades to cross its highs and anyone who got in at US $ 800 in 1980 (and there would be someone) will breakeven on an inflation adjusted basis when Gold crosses US$ 3300!!! Plus it is not like a stock where companies keep paying you off some dividend every year and you can calculate the EPS and argue against the PE.
One year is very short time to forget about what happened with SENSEX & CRUDE OIL. Most of us think twice before going long in GOLD from this point. That dose not mean that GOLD can not go Northwards but fear of BUBBLE BURST is always remain at the back of mind.
nobody should invest more then 10-15% of their portfolio in gold.diversification does help.not investing in gold at all is not a sound advice.do not forget gold has kept its value intact for the past 3000years versus equity (100 year ).
Posted on:3/3/2009 9:37:31 AMHitesh Shah
Oops! No edit button here!
The problem with bubbles is that while they're inflating the majority believes the price growth is genuine. When it bursts of course the truth is out. I'm sure people followed the discussions on how much of the price of crude was due to demand & supply versus speculation. That time too there were loud voices attributing the build up to pure cold logic of demand and supply and at the same time justifying the role of speculation in price discovery.