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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Gold: Interesting Facts and Stats

Posted by Muthu on September 9, 2010

Yesterday afternoon I got a call from the head of ‘Varthaga Ulagam’ program of ‘Sun News’ offering an opportunity to participate in their live show tomorrow. It was indicated that the topic may pertain to ‘Gold’. So I thought why don’t share some interesting Facts and Stats about gold with you. Request you to send your feedback to me today, which may be of use in tomorrow’s program.

Gold, an inevitable possession in every Indian house hold, right from the Ultra Rich to the poorest of the poor. In no other country in the world, gold enjoys such a social prominence. We Indians are always unique.

From the history known to us, gold has been used by our civilization from 4th century BC.

The total gold extracted since the history of mankind and is now available in the world is 1,65,000 tonnes. Do you know something interesting? The private Indian consumers (like you and I, excluding Government etc.) have 18,000 tonnes of gold with them, 11% of world’s total Gold.

South Africa has been the largest producer of gold for a very long time, before it was over taken by our big brother neighbour China in 2007.

Indians buy around 25% of World’s gold every year, approximately 800 tonnes, out of which around 400 tonnes are imported every year.

How gold derived its value initially? Well as the availability of the gold in the world is limited, it was classified as a precious metal. It was the sole medium of exchange after we evolved from barter system.

Historically gold coinage was widely used as currency; when paper money was introduced, it typically was a receipt redeemable for gold coin or bullion. In an economic system known as the gold standard, a certain weight of gold was given the name of a unit of currency.

Traditionally gold is measured in troy ounces which are larger than normal ounces. A troy ounce is 31.103 grams – there are 32.150747 troy ounces in a kilogram.

For a long period, the United States government set the value of the US dollar so that one troy ounce was equal to $20.67 ($664.56/kg), but in 1934 the dollar was devalued to $35.00 per troy ounce ($1125.27/kg). By 1961, it was becoming hard to maintain this price, and a pool of US and European banks agreed to manipulate the market to prevent further currency devaluation against increased gold demand.

On March 17, 1968, economic circumstances caused the collapse of the gold pool, and a two-tiered pricing scheme was established whereby gold was still used to settle international accounts at the old $35.00 per troy ounce ($1.13/g) but the price of gold on the private market was allowed to fluctuate; this two-tiered pricing system was abandoned in 1975 when the price of gold was left to find its free-market level.

Central banks still hold historical gold reserves as a store of value although the level has generally been declining. The largest gold depository in the world is that of the U.S. Federal Reserve Bank in New York, which holds about 3% of the gold ever mined, as does the similarly laden U.S. Bullion Depository at Fort Knox.

In 2005 the World Gold Council estimated total global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes.

Our memory is always short and recent. Most of the people I come across think that the gold price is always increasing. Well there was a strong bear market in gold for close to 20 years when the gold prices fell from a high of $27,300 per kg on January 21’st 1980 to low a of $8131 per kg on June 21’st 1999. A fall of 70% in 20 years. The 1980 high was not exceeded until January 3, 2008. This means it would have taken 28 years to plough back your capital (without adjusting for inflation), had you invested in gold in 1980.

The above data should make people more cautious that gold prices cannot keep going up forever. Gold is a commodity, may be a precious one. However all commodities are cyclical in nature, falling and growing, again falling and growing.

The current increase in price is not due to domestic demand, but because central banks across the world are buying gold as a hedge, as the World’s financial market is very uncertain today. How long and whether this trend would continue is a million dollar question? Well, no one knows.

If you browse websites, there have been predictions by some gold analysts that the price would appreciate by another 500% in next 5 years. Looks very unrealistic. But given the global scenario and the weakening dollar, who knows? All I can tell you is gold is in the ‘bubble zone’. How far the bubble would grow and how long it would last is very difficult to tell. If you are an investor or a Speculator in Gold, be smart to exit before the bubble burst. Otherwise, as mentioned above it can even take 30 years to get your original price back or you may never get also (remember the dotcom bubble of 1999-2000).

Many people tell me that the gold has been doing well even then the stocks and it is wiser to invest in gold rather in stocks or equity mutual funds. The fact speaks otherwise. Gold has provided an annualized return of 17.13% in the last 8 years ( 1’st April 2002 to 31’st March 2010). In the same period Sensex has provided an annualized return of 28.39%.

In the current gold bull run, the highest ever increase was in FY‘05-06 at 39%. The lowest increase was in FY’04-05 at 1%.

Interestingly even our Government wants to participate in the current gold bull run. KGF (Kolar Gold Field) was declared as a sick unit and shut down in 2001. Now Government plans to reopen it and extract gold again. It is estimated that KGF has gold reserves that could yield 10 tonnes of Gold per year for 15 years. With Gold selling at a record Rs.19,000/- per 10 grams, it is a mouth watering proposition for Government. By the time, we decide and extract gold from KGF, what would be it’s value? No one knows and our Government is also willing to speculate.

Coming to quality, 24 carats is the pure gold. What we use for ornaments is 22 carats gold (91.6% purity, always known as 916 hallmark gold). There are countries which even uses 18 carats gold for making ornaments. In India, the accepted purity for social purposes is 22 carats.

Coming to the interesting question of whether one can buy gold at current prices?

The answer is both yes and no.

Yes, if there is a social event like marriage for which you need to buy gold.

Lumpsum investments in gold may be avoided for investment or speculative purposes.

So what to do?

We’ve always been advising our clients to hold 5% to 10% of their total assets in gold, as gold has proved to be a safe haven in turbulent times and is a good hedge against inflation.

We also wrote 2 months back about forthcoming ‘Gold Bubble’ (may be from now to next 5 years).

Please do not go overboard on gold and at the same time ignore the gold altogether. As suggested, you may keep upto 10% of your assets in gold.

The moment we talk about gold, buying a gold ornament only comes to our mind. This is an expensive and wasteful option to own gold.

Buy jewellery for ornamental purposes only and look at the following option for investments.

The best way to own gold is not physically but through ETFs (Exchange Traded Funds). Here, you convert gold into a financial asset as units (normally 1 unit would be equal to 1 gram of gold) and hold it in demat form. There is no physical threat like robbery, obtaining and safe guarding it in a bank locker etc. You are able to buy pure 24 carat gold in an electronic form and which has relatively easy liquidity too. When you want to redeem it, you can sell it at the current market price, and avoid 5% liquidation charges (melting charges levied while selling back).

Opt for Systematic Investment Plan (SIP) in gold. Say buy 1 unit or 1 gram every month, so that your acquisition cost gets averaged out, despite a bubble and burst.

Buying through MCX (Multi Commodity Exchange) is not an advisable option as you are speculating on the future price rather than investing. Also given that the margin money required is only around 10%, you would heavily loose, because of leveraging, if your judgement goes wrong.

Please remember the following.

1)   Gold at best protect your wealth but does not enhance it. It does not yield any dividend or interest.

2)   Past performance and history tells us that gold is a mere hedge against inflation (i.e.) the growth in value corresponds to inflation in an economy or world, over a long period of time.

3)   The average returns over the long run are only in single digit.

4)   As gold ceased to be an underlying asset of printing currencies of the nations, there is no real value to gold other than what we socially attribute to.

5)    There’s no or very less industrial consumption for gold.

 6)  The gold of today is not the gold of old- a largely physical asset that was a safe haven in troubled times. This is now a paper asset; with highly liquid and highly leveraged markets where derived proxies of gold trade in much larger quantities than any underlying demand.

 7)   To reemphasise, do not hold more than 10% of your assets in gold. For investment purposes, buy gold ETFs in a SIP mode. Buy jewellery only for social occasions or ornamental purposes only.

(With data inputs from Outlook Money, TOI and Wikepedia)

One Response to “Gold: Interesting Facts and Stats”

  1. sumit said

    nice explaination, but what about the limitation of gold avaibility in future, it will be less & less in future. that means price of pure gold will be get higher in future. just a thought you might explain it further. THANK !

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