It was refreshing to meet some old friends outside a popular sandwich joint; especially after being home confined for almost 7 months. An unsaid ritual of sorts, I was asked for a “stock tip”. This time, I shared that ‘Gold’ seems attractive for the next few years.
On expected lines, one of them quickly retorted “Markets are on steroids, so many stocks are flying up 5% & 10% daily. Of all the stocks in the world, you want us to buy gold, which is already at Rs. 50,000!”. Surely, a lot of people would have resonated with my friend’s impatience – that there is an eleven course buffet meal going on and we are suggesting to eat some mundane “dal-chawal”.
Well, the boring advice comes from our assessment that the stock market party is surely not in its early stages. A large part of economic recovery which may happen in 2021 has already been celebrated by the stock markets. Hence, at this stage the risk-reward for a new investor may not be extremely rosy. Read below on why we think that gold offers good risk reward:
Possibilities that can reward gold
1) Inflation can raise its head soon: Prices of oil, gas, metals and other materials have been extremely subdued since out-break of Covid. Prices may start going up as economies across the globe start opening up. Many ‘suppliers’ of these commodities have gone bust in the difficult post-Covid world. As such, there could be a situation that supplies don’t keep up pace with the demand. Gold typically does well when inflation in high.
2) Central Banks can slowly start withdrawing the stimulus: In order to save the global economy, trillions of dollars of monetary & fiscal stimulus have been given by central banks across the world. That has resulted in near zero interest rates across developed economies and low interest rates in India as well. While, this easy monetary policy can continue for next 12-24 months, some day the central banks will have to start reversing it.
3) Indian currency may depreciate to 80+ levels vs USD: India is a big importer of oil, gas and few more commodities. As demand goes up within India too, we will have import more and that too at higher prices. This coupled with central banks starting to withdraw the COVID stimulus could become the perfect backdrop for currency to weaken. We have seen what happened in 2013, when the US FED started to taper the stimulus given during Lehman crisis. (Rupee depreciated from 63 to 70 in a few months). All this bodes well for gold.
4) De-globalization & reducing dependency on China: Over last 20 years, China’s ever expanding low cost manufacturing kept global inflation under control. In the post Covid world, a lot of countries have expressed desire to reduce the dependence on China. This can add to long term global inflation.
Long term observations on gold
Preserves purchasing power: Relative to all other forms of currency, Gold has preserved purchasing power over long periods of time. Below is a simple example of AMUL butter that will help you understand the concept of purchasing power:
• Rupee lost 98% of its relative value in 50 years: One rupee could buy 100 gms AMUL butter in 1970s. Today, you can hardly buy 2 gms of butter for that amount.
• US$ lost 75% of its relative value in 50 years: Contrast this to the mighty US$, one dollar could buy 600 gms AMUL butter in 1970s. Today, it can fetch you only 150 gms.
• Gold has gained in relative value in 50 years: Contrast this with gold, 1 gm could buy 1.5 kg of AMUL butter in 1970s. Today, you can buy 11 kgs of AMUL butter with just 1 gm gold.
Hedge against madness: Over your lifespan, you would witness madness of various kinds. Those who had kept money in US bank deposits in 1930s, lot of that money could have evaporated as more than 300 banks collapsed in the Great Depression. More recently, those who were living in Zimbabwe and had savings in local currency, their entire worth would have reduced to a “loaf of bread” due to hyperinflation. Gold has preserved value through all kinds of human inflicted madness like wars, government failures, economic mismanagement, pandemic, etc.
Survivor for more than 2000 years: Gold has been in use as currency & store of value for more than 2000 years. Over time, many “alternatives” have tried to compete with gold. Each time there has been a beautiful narrative around the alternatives too. Some examples below:
• Silver & platinum were once touted as alternatives
• Oil was once called black gold
• US$ is a sort of reserve currency since last 100 years,
• Data is often touted as the new gold
• Crypto currencies are recently being compared to gold
However, let us not forget that time erodes the importance of most of these alternatives. Even the mighty US$ has been the reserve currency since the last 60 years only. Gold has a recorded history of more than 2000 years!
The advent of digital gold
The last few years have witnessed emergence of some credible digital options. Government gold bonds, gold MFs and gold ETFs are some of those instruments. Govt gold bonds offer 3-5% discount to open market buyers and also the prospect of 2.5% annual interest. It’s probably the best mode of owning gold – you get discount, annual interest and the capital gains! More sophisticated investors can invest in gold mining funds or companies that benefit from rising gold prices. You can write back to [email protected] to explore more.
Disclaimer: The above article is for educational & informational purpose only and should not be construed as an investment advice. We may have totally different time horizon and perception of risk & reward compared to you. Hence, it’s best for you to consult an investment advisor.