Here are some very sound reasons as to why you should adorn at least a part of your portfolio with the yellow metal
GOLD is on a roll. The yellow metal has given a whopping return of 47.7% over the past two years in dollar terms. It currently quotes at a price of around $1,350 per ounce (1 troy ounce = 31.1 grams). However, in rupee terms the gains have been a little lesser at around 40.7% during the same period. The price of gold in India is currently around 19,950 per 10 grams.
So why are the returns different in rupee terms? Like most other commodities, gold is priced in US dollars in the international market. And the US dollar has been losing value against other currencies, including the Indian rupee. The rupee has appreciated by around 6.2% over the past two years, and currently quotes at around 45.6 against 48.6 two years ago. This has limited the returns in rupee terms. Let us understand this phenomenon through a simple example. Let us say at a certain point of time gold is at $1,000 per ounce. A year later, it is
at $1,200. The return in dollar terms is 20%.
Now, let us say one dollar was worth 50 initially. So, at that point of time in rupee terms, one ounce of gold was worth 50,000 (1,000 x 50). A year later, one dollar is worth 48. At that point of time, one ounce of gold will be worth 57,600 (1,200 x 48). This would mean a gain of 7,600 (57,600–50,000) or a gain of 15.2% (7,600 expressed as a percentage of 50,000). So even though return in dollar terms is at 20%, the return in rupee terms is rather limited at 15.2%. Of course, an appreciating rupee will limit gold returns, but that does not mean that gold is not a good investment bet.
The Twain Don't Meet:
The price of gold and the US dollar are inversely related. When investors start losing faith in the US dollar, as they have over the past few years, they start bidding up the price of gold. And when the world views the dollar as a stable currency, as it has all these years, the price of gold doesn't go anywhere. But lately that has not been the case. The Federal Reserve (the Fed), the central bank of the United States, has been printing dollars big time to get the US economy, up and running again. Since the start of the financial crisis, the Fed has printed nearly $2.3 trillion (1,04,88,000 crore at the current ex-change rates) to revive the US economy. The idea was and is that with more money in the financial system, banks will lend more. The increased lending will help people buy more goods and services which, in turn, will benefit companies and thus generate more employment and hence more consumption. What sounded perfect theoretically hasn't really worked out primarily because banks haven't been lending.
However, when anything is suddenly available in excess quantity, it tends to lose value. So, if the US government prints dollars, as it has in the recent past, the dollar will lose value against other currencies. This, in turn, means that other currencies will appreciate or gain value against the dollar, as the Indian rupee has over the past two years.
Competitive Money Printing:
An appreciating currency hits exports and exporters. Currently, one dollar is worth around 45.6. So an exporter exporting products worth a million dollars makes around 4.56 crore. If the rupee increases in value against the dollar and one dollar is worth 44, the exporter will make only 4.4 crore or 16 lakh lesser. Several countries make a lot of money by exporting raw materials and finished products to the US. And they do not want to lose out on their competitive edge. So, they have started printing money to ensure that their currencies do not lose value against the dollar.
As Central bankers in Brazil, China, Chile, Japan, Russia, South Korea, and Thailand, have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US-dollar versus their own currencies.
The Impact On Gold:
As more and more currency across the world is printed, all the smart investors will head towards gold, driving up prices of the yellow metal. The biggest beneficiary of the growing currency trade wars is the precious metals — gold and silver — basking in the growing supply of freshly-printed paper currency worldwide. It also does not help that a lot of countries like Japan are printing money to tide over their fiscal deficit. The Bank of Japan, the central bank of Japan, is printing money to finance half of the annual fiscal deficit of around 44 trillion yen this financial year.
All this of course does not augur well for paper currencies around the world. In this economic environment, there is one currency which is of immense intrinsic value and is also limited in terms of supply, and that is gold. Gold is now a default currency as no one wants to hold any currency. To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends.
Is A Temporary Correction Due?:
Gold prices have run up to never before seen levels, due to the competitive money printing that is happening all across the world. But is it in the bubble territory as yet? Bill Bonner, founder president of Agora Publishing and director www.equitymaster.com says, It's not in a bubble. It is in a little peak. I wouldn't be surprised to see a sell-off. It did that in the '70s, when the bull market went from $41 to $850 per ounce. But in 1974, right in the middle of it, there was a counter trend and gold fell 50
He feels that the price of gold is overdone and is ready to correct all the way down to $1,200 per ounce. But prices will continue to go up. Even though Rosenberg feels that gold prices are due for a correction in the near term, he has for long maintained that the price of gold is likely to touch $3,000 per ounce. He stills stands by that view. We see gold at around $2,000 per ounce (around . 30,000 per 10 grams) in another couple of years.
Should You Still Be Buying Gold?
: Investment experts believe that every individual should have 5-10% of his or her total portfolio in gold, as it is the best hedge against the vagaries of global recession or depreciation in the US dollar. At all times, and especially in the current environment, gold should always form a part of any investor's portfolio.
As William Bonner & Addison Wiggin write in the 'Empire of Debt — The Rise of an Epic Financial Crisis': There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.
Ø An Indian investor can make money from gold in the following four situations:
Ø The price of gold in dollar terms goes up. The rupee also depreciates against the dollar. This is the best case scenario, but highly unlikely
Ø The price of gold in dollar terms goes up. The rupee continues quoting at the same rate to the dollar as it is right now
Ø The price of gold in dollar terms goes up. The rupee appreciates against the dollar, but it doesn't appreciate enough to knock off the gain in dollar terms
Ø The price of gold in dollar terms falls. The rupee depreciates against the dollar so as to knock off the fall in price in dollar terms
