My Tenth Cent

I have never invested in gold and never liked gold, not until now. So, I started this article thinking I would write that gold is NOT a worthwhile investment. We should stay away from it. And why not? Many famous personalities in the investment world are against investing in gold.

Warren Buffet, the legendary investor has said that

“Gold is a way of going long on fear. What motivates gold purchasers is the belief that the ranks of fearful will grow”.

Back home, Dhirendra Kumar, CEO Valueresearch has said that:

“Investment is something which yields something for some underlying reason and gold has none of those variables. It just sits in your locker and if you have too much of it, you have to spend money to preserve it, ensure its safety. You have earning from equity, interest coming from fixed income, rent coming from real estate. Gold does not produce anything”

So, learning from these investors I always held the view that you should stay away from gold. There are better alternatives.

But over the course of my research for this article I had to change my view. So, this article gives the story of my pursuit behind gold as an investment.

You can alternately also watch the video:

Gold Mania Since Ancient Times

Why are we so fascinated over a metal that has no real productive use? The industrial use for gold does not justify the demand. Yet gold is the most sought-after metal. Why?  In the answer to this question lies the rationale for gold as a worthwhile investment.

Our fascination with gold is thousands of years old. The oldest gold treasure found dates to 4,600 BC in the town of Varna in Bulgaria.

So, if anyone thinks that investment in gold is a bubble. It will burst one day and we will all stop buying gold. Well, if this is a bubble, then it is over 5000 years old! And there is no bubble that has lasted 5000 years. So, there is something more fundamental at play.

Gold : An Alien Material?

A trivia question. We get gold from gold mines. But how did gold come into the mines in the first place? 

This question is relevant for a more fundamental question on supply of gold on our planet. Many of you may not know the answer to the above question? At least I did not know.

Modern scientists believe that the gold that we use does not form on earth. It is a result of gigantic explosions of stars in space. The gold was then brought on to earth by the meteorites (shooting stars) that crashed onto the Earth.

Why am I telling you this? Because what the above theory really tells us is that gold supply is finite. We cannot produce gold in a lab. There have been a few attempts, but none that is cost effective or practical. So, supply is finite. This is partly the reason why this metal is precious. But only partly.  Because the fascination for gold is deeper rooted.

Psychology Behind Fascination & Demand For Gold

All our life we are busy doing 3 things:

• consuming
  
• storing for future consumption; either for us or our children
  
• exchanging goods & services to enable us to do either or both of consuming & storing.
  

This is our nature and will never change. Now to store for future consumption, we need something that captures the value of our wealth. This thing cannot also loose the value captured as time progresses. Right?

For example, imagine you have 100 items of something (be it gold, currency, grains of rice or whatever). Something that you think will help you buy the items you want to consume for the next foreseeable future. Now 3 years later these 100 items decay, loose value and is now worth only 50 items – what happens to your wealth? In spite of doing nothing you are still poorer by 50%. So that wouldn’t work.  

This is where gold steps in. This is the genesis for our fascination with gold.

Gold has certain remarkable properties which make gold attractive as a store of value.

1. Gold does not corrode or decay; practically ever. If you have 100 grams of gold, even after 200 years you will still be holding 100 grams of gold. You cannot say this about other metals such as iron or copper.  In fact there are very few items in the world which has this property.
   
2. The supply of gold is just right. The supply is not too less and not too high. The supply is just enough for people to create coins and jewellery and own a piece of it at a price. But rare enough and quite expensive to extract that everyone cannot get it easily.
   
3. A dense metal. Gold is almost 20 times as dense as water. This means that you can pack a lot of gold into a very small space.  So, it is very easy for someone to move around carrying with him a lot of value in his pocket.  It amazed me to read that we can melt all the world’s gold supply and hold in 3-4 Olympic size swimming pools.
   
4. Gold is malleable. You can make gold in any shape you want – coins, bars or jewellery.
   
5. It is easy to find out the purity of gold. You cannot say the same about other precious items such as diamond or ruby.
   
6. It is shiny and we can make beautiful ornaments. As a result, gold has got a firm place in our psyche, our customs and our culture.
   

So gold is easy to manage, easy to transport, not easily available and does not change in form or shape for hundreds of years. This is exactly what you need to store your wealth. 

So gold is like a currency. A promise that it will hold value to help you buy what you need.  Even a family buying gold jewellery thinks gold will come in handy in bad times.  I think gold is the oldest currency in circulation today. That is the genesis for our fascination for gold.

But many people categorize gold along with other commodities such as iron or crude oil. I agree that gold is also a commodity. There is a supply demand dynamic at play. But if look at gold just as a commodity, you miss the entire perspective.

The way I look at it, gold is like a commodity but ultimately a currency. A currency like US Dollars or Indian rupees. 

Also, even currencies such as US Dollar or Euro cannot come close to gold. Because the fate of an economy decides the fate of its currency. If an economy does poorly, the value of its currency will drop over time. One example is Zimbabwe Dollar which lost all its value over time as the economy went down. Whereas gold does not undergo any change. Two hundred years later 100 grams gold will still be 100 grams.

Will this fascination end any time soon?

The short answer is – unlikely. Why? There are many reasons for this

1. There is no other material to replace gold. Not silver, not diamond, nothing. Because no other material is corrosion free or is widely available or is easy to find out its purity. And we do not have any technology to manufacture gold.
   
2. ~50% of the gold in circulation today is in the form of jewellery. There is a lot of emotional attachment to it. People don’t sell jewellery even if gold prices fall. You hoard it and pass it from generation to generation.
   
3. Do you know who are one of the largest holders of gold in the world? Central Banks i.e., Governments. The governments of the world hold one of the largest reserves of gold, not in the mines but in the vaults. This is part of the wealth of a country. The wealth that decides the value of a currency of the country. The wealth that shows the strength of a country’s economy. So tomorrow even if a better alternative comes for gold, do you think governments can overnight switch out of gold? In fact for some countries gold is the primary share of their foreign reserves.
   
4. By the way, the above is just government held gold. On top of it slightly larger quantity of gold is held for investment purposes in the form of ETF, gold bars and such.  
   

Over all at current international gold price of ~USD 1,800 per ounce, the value of gold in circulation is close to USD 12.5 trillion dollars. This makes gold one of the largest investment categories globally. This is around 4 times the size of Indian stock markets.

So, how can you lose the fascination for something which you are emotionally attached? Something which also is a currency? A store of value and we all need items to store value. 

And we cannot depend on one item to store value. That is a risk because if for whatever reason that one item loses its value then we are in trouble. So, we all try to diversify our holdings, right? As an individual we keep our wealth in bank deposits, shares, real estate and so on and so forth. A government keeps the country’s wealth in the form of foreign currencies such as US Dollar, Euros and Gold. So, gold will continue to play an inherent role in our lives and country’s reserves as an alternate currency.

That is why I said in the beginning. Gold has been around for 5000 years etched into our minds. I don’t see that changing any time soon.

Now coming back to the original question. Does this make gold a worthwhile investment?

We will see pursue answer to that question in Part 2.