Saturday, January 10, 2009

About Gold - An Opinioniated Article Against the Majority

We met an old finance lecturer today and boy does he look old. He told us to buy Gold because the value of the US Dollar is forecasted to decline in the long run and Gold is deemed to be inversely related to the USD dollar. Should we listen to him? Yes, we agree with him that the US Dollar is highly likely to decline, but still should we buy Gold? As Indians are particularly fond of Gold, we decided to go to Mustafa Centre to immerse ourselves in the big jewellery shops they have there where one would feel like they are in Gold Wonderland, with the precious metal glittering all around you. We spoke to the staff there and all we remember is " Buy Gold".

We decided to go back to our garage to be a keyboard warrior to do some research on the internet and most signs point us to buy Gold. Great!
Lets look at the charts. Gold has indeed risen extraordinarily,especially since 2005 onwards. The known factors that affect Gold are the following:
1) US Dollar - If the value of the US dollar is declining due to inflation or the Government printing too much money, Gold will go up.

2) Demand of Jewellery - Higher jewellery demand = higher Gold Price


3)Ease of buying and selling Gold - Due to more and more Gold ETFs, e.t.c. As when one makes things easy for people to buy and sell, people will trade more.

The combination of the above 3 factors should suffice to explain the rapid increase in Gold Prices from 2005 to 2008. So let us see what Warren Buffet has to say about Gold:

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

As usual, as we don't follow blindly to opinions unless substantiated with data and facts ( who cares if he is warren buffet or Jim Rogers or Obama or Hu Jintao or Mother Theresa), we decided to check Wikipedia to find out more about Gold and its uses.
According to Wikipedia, Uses of Gold ( in addition to store of value and Jewellery) are the following :

1)Medicine - used as dental fillings, used as conductive coating in electron beam microscope, used to treat rheumatoid arthritis

2) Food and drink - Gold leaves in drink

3) Electronics - generally, electrical contacts due to its high conductivity.

Frankly, the above uses of Gold, in our opinion, are lame. Do we really need to drink Gold Leaves and just how many people actually drink Gold Leaves? Dental fillings can actually be grouped under Jewellery, a luxury good and just how many people have dental fillings and how much Gold is needed for a dental filling? And how about Gold use due to its conductivity? Lets look at the table of conductivity for various metals( see below), again from Wikipedia. Silver and copper are better conductors of electricity than Gold. So Gold does not seem to have much of an "economic moat" for its use as a good electrical conductor.The only valid use for Gold, therefore, is definitely as a "culturally accepted" store of value as it is really quite a useless metal. And "culturally accepted" things are quite fluffy. Read more on the "culturally accepted" tulip flower in the mid-1630s where a tulip bulb can be used to buy a house.

So will one make money by buying Gold?Quite possibly yes because of the inverse correlation between Gold Price and the US dollar ( see chart below) and the US dollar value is highly likely to go down, but we rather forgo this opportunity as we don't like things without any fundamental underlying demand other than its demand just hinging on the fact that it is culturally accepted. Furthermore, Gold's supply is generally constant as it does not spoil and not generally consumed ( just look at the lame uses above). Compare this with other commodities, say oil, where the supply is common sensically dwindling as its always constantly consumed while demand is fundamentally increasing in the long run. Based on this, basic economics of demand and supply states that Gold is a inferior investment than oil, for example.

To be fair to the Gold Proponents (Majority), here is a link to a website that explains why Gold is worth investing:
http://www.gold-eagle.com/editorials_02/hommel102802.html

Demand Breakdown for Gold ( added on 11 Jan 2008)

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

2 comments:

  1. Gold is certainly a good buy as US dollar is a junk currency. But currently gold price is trading at 820, I will wait for it to fall below 750 before I will be interested.

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  2. Gold is not actually a good investment on today's market because they are starting to hit all time low since 2009. But if you are a bearish trader then this would work just fine, check traderxp broker review www.tradersxpreview.com to see how the gold fair in the market so you may have a good idea about the trade you are making.

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