As we all know before the turn of the last Century, Aluminum was thought to be more precious than Gold. Most powerful kings were served food in aluminum utensils while the lesser knights had to do with gold flatware. The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, it was disposable - as in aluminum foil or cola cans. In no time it transformed from most expensive thing in the world to garbage.
In past couple of weeks we have received numerous queries from
many readers about the strategy for gold; some of these being panic struck. The
underlying theme was the fear that the gold might have taken a wrong turn on
the path that follows aluminum journey to south.
We asked the following three questions to some of those who were
most jittery.
(a)
Did you INVEST in gold? If yes, what prompted
you to do so?
(b)
Have any of the assumptions that prompted you to
invest in gold changed in past couple of weeks?
(c)
Gold forms how much proportion of your networth?
We have got no reply so far. We are not expecting any either.
In our view, the gold is a non-productive asset that cannot and
should not be considered as an investment option.
Traditionally, for many centuries, it has been considered as a
store of value for its limited supply and physical traits that make it
indestructible. It should be considered as such only and used for parking a
small part of one’s networth (say 5%) for extreme emergencies. Normally, you
should not bother about the market price of gold bars (or ETF units), as you do
not about the market price of your home (unencumbered) or ancestral jewelry,
unless you are on the brink of bankruptcy.
Insofar as the recent fall in gold prices is concerned, this
could be a normal market cycle. The gold prices corrected more sharply during
1975-76 and to similar proportions in during 1995-99.
It is important to note that none of the assumptions that caused
12yr bull market in gold has changed dramatically in past 2months. Most large
economies in the world remain fiscally challenged. Interest rates in developed
world are close to zero and may only rise in the coming years. The only way for
governments to ease fiscal burden would be to keep real rates negative -
gradual rise in inflation as interest rates bottom out. In this scenario bonds
and stocks may remain overvalued for extended period of time – creating a
favorable environment for gold.
The so called currency war, will push central bankers to
accumulate more gold; and poverty alleviation in India, China and other
emerging economies will create enough consumption demand. A bonus could be if a
sub-prime like bubble pops out in gold. Remember a few months back Germany
asked for its gold back from US!
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