Importance of Gold in Pre-1980’s Period
Gold had quite an importance in that period of time. The reason behind that was, earlier whenever a country used to print new currency notes, they had to keep the equal amount of gold aside and then only the country could print those currency notes. But in 1980’s this rule was not applicable.
The USA has decided that it will not be against the gold reserve. All the countries are free to print whatever money they have to print. But this does not mean that anyone can print any amount of money, because it’s not that simple. Whenever a country prints new currency, the inflation in that country goes up and the value of the country’s currency depreciates. And this is exactly what has happened with many countries. So, countries try and mange these things through interest rates. So, whenever the countries want to do quantitative easing, they will pint new currency notes. But the countries also want to have a stable supply & demand in the market and will accordingly print the new currency notes.
Sensex v/s Gold
Let’s see the period of 1979-1980. In this year, Sensex was launched with the value of 100. The gold price in this year was close to Rs. 800 per 10 grams.
The Sensex level currently is around 35,000 level. We can see that the total growth is almost 350 times. The current price of gold is almost Rs. 30,000 per 10 grams. Here, we can see a growth of almost 35 to 40 times in gold prices from 1979 up till now.
The reason behind these growths are huge investment in gold, which is a dead asset. Gold will not help the economy, in any business or anything particularly. Whenever one consumes petrol, there’s some contribution like in transportation. But the gold commodity is a dead asset class.
Gold: a Dead Asset
Warren Buffet has a very simple explanation for this. According to him, all the gold currently available in the world has a value of 9-9.5 trillion dollars, which is almost 4-5 times of Indian economy size. If all the gold in the world was to be melted and shaped in a cube, then the cube’s size would be 68 ft × 68 ft × 68 ft, This cube of gold is of no use at all to the world economy. If the 9.5 trillion dollars were to be present in real life, then one could create 4 Indian sized economies out of that. Warren Buffet always question why this gold commodity is growing and why people are investing in this commodity.
There is no practical use of this commodity in any of the businesses except the jewellery business, just because people think buying gold will add some value to them.
Gold Prices and US Economy
The gold prices will always increase whenever there is any problem in the US economy. This is so because many other economies like China and Russia tried to manipulate the US dollar by acquiring more and more gold. But they failed miserably after 2008-2009 as they just kept on piling up their gold reserves and did not help their economies too and also couldn’t replace gold versus dollar. That is why dollar is the main reserve for all other economies. And thus, until and unless there is a problem in the US, gold prices will not increase. The gold prices went up from 10,000 to 30,000 in 2009,2010 and 2011 because of the major 2008-2009 crisis that happened in US. This was the main reason why gold prices went up.
But after that period, there hasn’t been any return on gold as an investment. The price level is still stagnant around this level of 30,000 since 5 years. This is going to continue for some more time.
USD and INR relations
Major reason behind the rise in gold price is that, in 1979, 1 USD = 7.86 INR. And currently 1 USD = ~71 INR. Here, also we can see that the rupee has depreciated almost 8 to 9 times. So, effectively gold prices have increased in terms of dollar from 1080 up till now, which hardly 3 to 4 times. This is not a very good sign or good return in terms of dollar.
But vis-à-vis the Sensex (nothing but business or economy) has grown 350 times. This is exactly why one should have investment in equity rather than a long-term investment in gold.
Final Say on Gold as an Investment
For people who want to invest in gold should in fact prefer investing in a company that deals with gold, or sells gold or gold ornaments to the public, as this particular sentiment is always going to see an upward trend.