gold gIs gold good Investment?ood Investment?
Wed May 13, 2009 3:40pm IST
Is GOLD a GOOD INVESTMENT ???
(D. H. Pai Panandiker is the President of RPG Foundation. The views expressed
in this column are his own)
By D. H. Pai Panandiker
Since 2001 gold has been an attractive investment with an yield higher than on
many other assets. That yield came from the price of gold which has
consistently risen in the past eight years.
In the Indian market, the price of gold had shot up from Rs.1,180 per gram to
Rs.1,470 in the last one year though the international price of gold was more
or less stable. Gold became more costly in India only because the rupee
depreciated against the dollar.
Gold has been a traditional form of investment apart from being a favorite gift
at marriages and festivals. That is because, earlier, there were no alternative
assets, except land, to invest in and, unlike land, gold was the most liquid
asset with a ready market at all times and in all places.
Even today, when there are good alternative assets available, gold continues to
attract a good deal of investment. Gold imports have been in the range of 400
to 800 tons per year and the total stocks of gold in India have exceeded 13,000
tons. That makes India the largest buyer of gold in the international market.
The demand for gold this year has however been down partly because the price of
gold has been high.
The price of gold has gone through long cycles. It touched $ 850 an ounce in
1965 and thereafter suffered a long bear spell. By the end of the nineties gold
was down to $300. Since 2001 gold regained its place in asset portfolio of
institutions and individuals as its price began to shoot up. In the last eight
years prices trebled
.
Will gold continue to be a good investment? Not in the short run. For, the
bullion market is likely to be over-supplied with gold.
IMF will release 403 tons of gold to raise money to counter recession by
investing in affected developing countries. China, which is holding huge
reserves of gold, is also likely to go to the market to sell. Besides, the
demand for gold for jewellery is declining. As such, in the next year or two
the price of gold is likely to be steady or even decline.
Investors’ will be looking for other options. Bank deposits may not be as
attractive because the interest rates are now down to 7.5 per cent. The market
for equity has been improving because of better risk appetite on the part of
investors and, before the end of the year, is likely to be on the upswing. That
will divert investment from gold to securities which will earn a better return.
In the longer run it may be a different story. Production of gold has been
declining with the maturing of gold mines. Worse still, hardly any new sources
of gold have been discovered. Hence gold supply will shrink and prices over
time will rise to make gold a good investment though not better than equity.
(You can e-mail Dinker H. Pai Panandiker at: [email protected])
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