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Why invest in gold?

Sasha Naryshkine | Thu, 09 Apr 2009 07:15
[miningmx.com] -- "TRADING gold makes you old," is what a trader-type once told me, laughing as he said that.

I used to be a fan, if only for the fact that we export the metal and the better the price, the better for the country. But gold exports have fallen as the miners have to go deeper to fetcher lower-quality ore.

Eventually it runs out. And then what? How far away are we really from mining out the great freak of nature that Gauteng was founded on all those years ago in the late 1800s? It depends on the price of the metal, the fundamentals, which I must admit I don't understand.

I am desperate to try to comprehend why there are so many gold bulls around the globe who tell you forever that the price is completely wrong. It should be three times higher; more than that, these gold bugs say.

I don't understand why anyone would want to own gold; it pays no dividend, it has few uses other than pleasing your spouse as a birthday-slash-anniversary gift and it is difficult to make sense of what the real drivers are.

Sound investment sense or mumbo-jumbo?

Plus, Indian housewives make up a large percentage of the buyers of physical gold when the price is right which is, as far as I understand it, somewhere around $750 per fine ounce. They use the physical to store wealth, for marriage purposes, and to save for tough times.

I get it that gold can be a store of wealth; central banks all around the world agree with that. This is part a legacy issue. History dictates that central banks must hold some of their reserves as something physical, that is gold. Got it.

But I am with Warren Buffett on this one - watching from Mars, you would scratch your head and wonder why you dug it up from one hole to stick it in another and surround it with guards.

That is the one part. The other is more a case of why market participants value (perhaps value is generous) gold companies at crazy multiples because the reserves are perhaps worth much more. To me that is almost akin to saying that a food producer has many tins of beans and if the world should go to pot, those beans will go up in value at that point.

I figured that the gold lovers have had history on their side; the allure of gold has been too much for mortals. Pirates around the Caribbean plundered Spanish reserves in the name of the queen, so much so that their base, Port Royal, became the second-richest city in the world after London. Port Royal was no place for gentlemen or ladies; at one stage there was one tavern for every 10 residents.

Equities could be a better bet

Are modern-day gold investors the same as the pirates of all those years back - is the literature around the gold price just crazy talk? Or is it fair to say that if you don't understand an investment, you should just steer clear?

If it looks too flaky to make as an investment case, don't buy it. The questions that go around when looking to counter the investment case that the bugs make, is one that does worry me.

We live in dramatically changing times; millions of Indians have access to the equities market and could change their wealth creation and preservation habits.

What if Indian investors who hoarded gold suddenly decide that shareholdings in Tata or Reliance Industries will grow their wealth better in the long run? Human beings do adjust - in much the same way that the mobile phone exploded, investors can change their patterns too.

For the time being, pending inflation with all the stimulus packages delivered around the world and the dollar coming under pressure does bode well for the yellow metal.

Still, I would argue that stocks present a buying opportunity in a decade, even half a decade for that matter.

But, if gold is more your bag and keeps you happy to hoard the precious, then go ahead. I would prefer to sit on the sidelines.

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