Wise Wealth Advisors

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

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Archive for the ‘Gold’ Category

Prashant Jain: Equities are the real gold over long term

Posted by Muthu on March 5, 2015

Einstein said, “Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t… pays it”.

This has been experienced in India.

Sensex was incorporated in 1979-80, 36 years ago.

At 17.1% CAGR, Rs 10,000 invested in Sensex has become 290 times (Rs.29.4 lakhs) in 36 years, while in gold at 10.4% CAGR; it has become 35 times (Rs.3.5 lakhs).

Over 36 years, Sensex has multiplied 290 times where as gold multiplied by 35 times.

A difference of 7% in returns over longer term has resulted in 8x increase in wealth (Equities have multiplied 8 times more than gold).

The average inflation over this period has been 8% (CPI). Thus, gold has given returns that are close to inflation, thereby merely preserving the purchasing power and wealth. On the other hand, Sensex has delivered nearly 9% excess returns over inflation, thereby enhancing the purchase power and creating wealth. Over long periods, this has made a big difference.

The reason for this is simple. Equities over time grow in line with the growth of underlying businesses. As businesses comprise the economy, the nominal growth of the economy (real growth plus inflation) is a good proxy for the average growth in businesses.

The Indian economy has grown at a remarkably constant nominal growth of 15% per annum. No wonder that the sensex CAGR of 17.1% is close to 15% nominal GDP growth.

In India, it is interesting to note that in the last 22 years or so that FII have been allowed to invest in stocks in India, the FII ownership has gone up from nil to 24% — roughly 1% per year. The sellers obviously have been domestic investors.

The dollars received by the locals from sale of their shares have been thus invested in gold. Gold, as pointed out earlier, has yielded near inflation (10%) CAGR vs 17% CAGR for the sensex. In effect, domestic investors have been exchanging a 17% CAGR asset for a 10% CAGR one. This certainly is not a smart thing to do.

Outlook for Indian economy and Indian equities is promising. India is one of the best placed among largeeconomies in the world in terms of demographics, demand and growth. India is a key beneficiary of lower oil prices. The savings from lower oil prices are near 2% of GDP on run rate basis at current prices over CY13 average.

Apart from lower oil prices, a strong, growth-oriented government bodes well for economic growth and for businesses. Key decisions of new government so far give confidence that lower fiscal deficit is a priority and it should continue to fall. Equities are the real gold. Equities compound near nominal GDP growth rates whereas gold compounds near inflation.

(Edited & modified version of article by Prashant Jain:


Posted in Gold, Stock Market, Wealth | 1 Comment »

34 years return – FD, Gold, Silver & Sensex

Posted by Muthu on April 22, 2013

Please find attached 3 files

 a)     34 years return- FD & Sensex

 b)     34 years return- Gold & Sensex

 c)     34 years return- Silver & Sensex

 Why 34 years? Only in 1979-80, Sensex came into existence with base as 100.

 1)     Assume you’ve invested Rs.1 lakh each in FD, gold, silver and Sensex 34 years ago. As of 31’st March 2013 the value is as follows: FD- Rs.15.5 lakhs, Gold- Rs.37.17 lakhs, Silver- Rs.35.36 lakhs and Sensex- Rs.1.88 crores

 2)     Unlike other assets mentioned above, Sensex has dividend yield in addition to capital growth. Assuming a dividend yield of 2% on an average, the Sensex returns work out to Rs.3.35 crores

 3)     In terms of percentage, the 34 years return (as given above) is as follows: FD-8.39%, Gold- 11.21%, Silver- 11.05% and Sensex- 16.65% (18.65% if dividend yield is as assumed above)

 4)     When we talk about returns, we’ve to talk about inflation too. The average annualized inflation for the above period is 7.63%.

 5)     If Rs.1 lakh has been kept under the mattress instead of being invested, it’s value has come down to mere Rupees seven thousand (i.e.) purchasing power of rupee reduced by whopping 93% over 34 year period.

 6)     What we should look for is real returns (i.e.) returns after inflation and taxes. Since tax differs from each asset class and income category, I’ve taken only inflation. Inflation is common for all:-) 

7)     After adjusting for inflation, the asset classes have grown by following annualized rate in real terms. FD- 0.11%, Gold-2.72%, Silver-2.57% and Sensex- 7.74% (around 10% including dividend yield). These numbers matter a lot. This is what our wealth would have grown after adjusting for inflation. Since we know the tax details for each asset class and for our income, we can work out the return after taxes too. FD would automatically turn negative. Gold and Silver, despite run up in the recent years, would have provided a negligible return. Only equity would have provided a real rate of return of above 6%. 

8)     In the long run, the best we can aim and get even in asset classes like equity and real estate is real return of around 4%+. Growing money is that difficult. More important is not loosing the money. 

9)     Gold’s real rate of return of 2.72% is made possible due to rupee significantly depreciating between 1980s to early last decade. Otherwise we might have got even a negative return. I’ll explain this by example. Assume the rupee dollar conversion rate is 1 USD = Rs.50. For illustration purposes, let us assume the price of 1 gram of gold is 1 USD. With the above conversion rate, the value of 1 gm of gold is Rs.50.  Imagine a scenario when rupee depreciates by 100% (i.e.) 1 USD = Rs.100/- The gold price remains the same at 1 USD. The value of our gold would increase by 100% to Rs.100/- though the price has not changed in the international markets and we being the net importer of gold. 

10)  Any one who talks about increase in gold price for 50 years, 75 years or 100 years (I’m seeing many ads), without accounting for currency changes is fooling others. I’ve taken the gold price data from RBI. I don’t know about the authenticity of prices shown in many ads. 

11) Please use FD for contingency or emergency funds. Let gold be part of social requirement and not exceed 5% to 10% of investment portfolio. Silver is again part of only social or cultural needs. Sensex / Equity is for building wealth. I believe real estate also can build wealth but has no reliable long term past data. 

12) The last 5 to 6 years increase in gold prices have mainly come from speculators who invested in ETFs, gold futures etc. and not from jewelry demand. Speculators can move out as swiftly as they moved in. 

13) There are people who are saying gold would not go below $1300 as cost of production (break even price) is the same amount. Gold is not a typical consumer product which is sold at cost plus profit margins. Gold miners do not decide the gold price. They merely enjoy or suffer according to gold prices. Gold prices are influenced by a number of complex factors whereas fresh supply from miners is less than 2% of the annual demand. 

14) Please go through the workings and assumptions in the attached file. I’ve tried my best. It may not be perfect but would be a useful pointer. Request your opinion and feedback.

Posted in Basics, Gold, Muthu's Musings, Stock Market, Wealth | 12 Comments »

Gold- Do you know?

Posted by Muthu on August 21, 2011

Since you know my views on gold as an investment and what role it has in one’s portfolio, today let me share some interesting information about gold.

There is roughly 7000 years (beginning of civilization) of history of gold. 

We all seek permanency and gold comes near to that.

Gold does not get corroded or rusted. It is not soluble in any acid. It is very difficult to demolish.   

Most of the gold digged from time immemorial is still in circulation. 

So we may even be using the some of the gold (recycled) that was used in the times of Rama,Krishna, Buddha and Jesus.

It is very soft that you can beat the gold down so thin that sunrays can shine through it.

The quantity of steel poured in an hour in our planet is more than what has been poured for gold since the civilization. That is how limited the availability of the gold is.

It is estimated that total gold available (in circulation and storage) in the world is 1,65,000 tonnes.

1 tonne is 1000 Kgs. At Rs.2700/- a gram, the cost of 1kg of gold is Rs.27 lakhs. So 1 tonne of gold is worth Rs.270 crore.

Indians privately own anywhere between 15,000 to 20,000 tonnes of gold. Even pegging it at 15,000 tonnes, the value comes above Rs.40 lakhs crore. To put this in perspective, the entire public debt of our country is roughly around Rs.32 lakhs crore.

Since I cannot not talk about equity, the entire fund management industry in the country only manages Rs.1.6 lakh crore+ worth of equity assets.

Indian government owns only around 550 tonnes of gold.

No one knows how much gold the Indian temples have.

Tirupathi is estimated to have gold worth Rs.42,000 crores. Around 4000 kgs of gold is offered annually by his devotees to Lord Balaji. Interestingly as per legend, Balaji borrowed from Kubera 1.14 crore coins of gold for his marriage. Marriages have always been expensive in this country. By any standard, Balaji’s wedding with Padmavathi is the most expensive marriage that has ever happened so far in our world.

We never knew Lord Padmanabha is so rich. Is that why he is very relaxed (ananda sayanam)? The very conservative estimate suggests that the value of gold in his abode is around Rs.1 lakh crore. Assets are yet to be counted fully and valuation has not been done in detail.

Even the recently built golden temple in Sripuram near Vellore used 1500 kgs of gold for construction.

Reading various estimates and guesstimates looks like we (including deities) may have even 30,000+ tonnes of gold in our country. So we own around 20% of the entire gold in the world.

This means at today’s price, we have Rs.80 lakh crore worth of gold.India can be amazingly rich and poor at the same time.

Since gold is so malleable, just one gram of gold can be beaten into a sheet of one square metre!

The entire gold available in the world today can easily fit within a cube measuring 67 feet. Just one good shipping container would do! Golden Voyage!

75% of the gold available today has been extracted only after 1910.

The U.S.government (Fed Reserve + FortKnox) has close to 10,000 tonnes of gold.

During great depression, in 1933, U.S. government banned private holding of gold. People were ordered to handover the gold they have and were provided instead with dollars of equivalent value. Once the process was over, the government devalued the currency by over 40% eroding people’s wealth overnight. This coupled with high inflation was an extremely tough time for its citizens.

This ban was subsequently lifted only in 1975 and Americans were again allowed to own gold.

Since China has lot of dollar or dollar denominated assets; they understand the above risk better than anybody else. Chinese people were not allowed to own gold for more than 40 years and possessing gold was a severely punishable offence. Few years ago, this ban has been removed and China is actively encouraging (campaigning?) its citizens to buy gold and silver. This is because of fear from holding too much of dollars and U.S. treasury bills. They are trying their best to derisk the situation and that may partly explain the rise in price of these metals.

Talking about silver, Buffett who rarely touches commodity, purchased 37% of the entire silver available in the world in late nineties and sold it some time in the middle of the last decade. I think that considering the growing industrial demand and limited supply then, he saw value in purchasing the same and selling it at a very good profit. Silver was selling at abysmally low prices during the time of his purchase. Ofcourse some may argue had he held on to the position (just visualize holding 37% of all the silver available in the world), he would have made a big killing by now. May be I’ll dig and see if he has talked about this anywhere.

Every year, the new gold produced / recycled is consumed 50% as jewellery, 40% for investments (including ETFs) and 10% for industry. I was under the impression gold has no industrial use whatsoever till one of our client told me that electronics industry now uses gold.

Though South Africa has been one of the world’s largest producers of gold, its citizens were not allowed to own gold till 2009!

For sports fan, do you know that Olympic gold medal is not made of gold! A ‘gold’ medal contains only 6 grams of gold! Only till 1912 Olympics, the gold medals were actually made of gold.

In 1991, our country’s situation was so bad that 65 tonnes of gold was taken out of the country (mortgaged?) to tide over external payment crisis.

If you are worried that gold’s supply would get exhausted soon, fear not!

About 10 billion tonnes – 10,000 million tonnes (yes, you read it right) of gold is estimated to be held in the oceans of the world. An economically viable model of extraction is being explored.

Necessity is the mother of invention. If gold prices continue to rise and if the demand would only increase, who knows, a technological innovation can happen in extracting gold from ocean.

May be we can all then plan for building our own golden homes. Midas would be a happy man!

Posted in General, Gold, Muthu's Musings | 2 Comments »

Akshaya Tritiya – What you are going to do?

Posted by Muthu on May 4, 2011

In the current (May’11) issue of ‘Gokulam Kadhir’, my article on money required for providing the freebies, subsidies and promises made to the people of Tamilnadu by the both ruling and opposition parties has appeared. The issue has hit the stands on Sunday.

The journalist who worked on this article called me yesterday and said that the editorial board of ‘Dina Thanthi’ group (which publishes ‘Gokulam Kadhir’) was happy with the way the article has come out. It seems that there are already words of appreciation from many quarters including political parties!

If it has come out well, it is because of the good ground work done by the above journalist before coming and meeting me.

Arriving at data points like how many women become pregnant in a year in Tamilnadu, how many would get married in a given year, how many cattle are required were pretty interesting. I wouldn’t say these are very accurate but a good guesstimate.

It’s not that I look good; still my photo appeared on the above story is quite scary. Keep it out of the reach of children.

In my last 3 years of contributions to media (print or visual and latest is digital), my implicit understanding is something like this; I contribute to the media as it provides me a platform to share my thoughts and also help me get visibility. As a professional, getting visibility definitely helps. It’s a fair deal.

However ‘Moneylife’ surprised me by being more than fair. I’ve received a cheque from them for the contributions made last month. This is the first time I’m getting paid for writing!

Akshaya Tritiya is going to be there in next few days. Are you getting ready to buy gold? I understand that you may end up doing what you want to do. So I’m not writing anything with a hope that it may change your mind but just to share my thoughts with you.

The concept of buying gold on Akshaya Tritiya is only around one and half decades old. Some clever jewellers who understand our emotions pertaining to auspicious days and gold has invented this and even they would not have expected it to be such a super hit.

People are telling me that Rs.17,000/- per sovereign is nothing when compared to Rs.70,000/- per sovereign it is going to reach in next few years!

I’ve written recently about long term cyclical nature of gold. It keeps rising for long and then keeps on falling for long.

Timing is always difficult and tricky in any investments.

The perception for bullishness is that as dollar gets weakened, gold would get further strengthened and would become the global currency.

In my opinion, this idea is far fetched.

There are countries which have already started trading in currencies other than dollar. So other currencies may replace dollar, if dollar gets weakened a lot.

The GDP of the world is fast expanding. Especially BRICS & parts of Africa are expected to grow strongly in the decades to come.

If dollar fails, there may be short term panic resulting in appreciation of gold but I do not see gold becoming medium of exchange.

There is not enough gold in this earth which can be circulated as coins for it match to the global GDP and its growth. The entire gold available in the world can be put into a 67 feet cube.

 As Buffett says, this gold does not produce anything, has no intrinsic value, does not generate any income and has zero utility.

He also points out that this 67 feet cube of gold can buy all farmlands in U.S.A, 10 companies the size of Exxon Mobil and still leave $1trillion of cash (which is roughlyIndia’s GDP!). But gold cannot produce what these can produce. Given an option, would you want to own all farmlands or companies like Exxon or simply sit on top of the 67 feet cube and keep fondling it!

Some more pointers from Warren Buffett on gold from what he shared with Shefali Anand of Wall Street Journal:

Investors who buy gold are counting on them becoming more attractive to other people in the future. That’s a whole different game, compared to investing.

When you buy gold, you’re betting on the price of the asset not on the productivity of the asset.

You can’t get excited because other people are excited. So, every now and then, there’s a craze to buy something even at very high, irrational prices. Then all of a sudden, the music stops, and the investment comes crashing down.

It is better to invest in productive assets like equities and farmlands.

Inflation is a very cruel tax because it lowers the worth of paper money.

If an investor wants to beat the inflation and to maintain the purchasing power, it is better to invest in good businesses and companies (equities) which keep growing. “

As per some bullish predictions, even if gold would appreciate 5 times from now, my opinion remains the same. Gold is a speculative asset because it is a pure price play with no productive or intrinsic value. Gold has no other value than what we attribute to it.

That is why even in equities, we advice investing, which is a growth and productive play and not trading or speculation which is a pure price play. We neither understand speculation nor intend to.

Some one told me about a gentleman who is supposed to be earning Rs.50 lakhs per month through a MLM scheme.  Even if these claims are true, I’m least attracted because this is not a productive or a growth way but mere transfer of money to one’s pocket from those who are at the bottom of the chain.

I’m not greedy about wealth and am fine with what comes through fair means.

We’ve always been advising investors to hold not more than 10% of their assets in gold. This is for diversification, a hedge against inflation and as something which would come handy at the times of global catastrophe.

If you’ve any immediate social need like marriage in the family, then buy gold. Price is immaterial because anyhow you would be needing gold.

If the social occasion is not in the near future or if you want to invest (as I said not more than 10% of your total assets), then I would suggest you to not to buy at one go but invest regularly through SIPs in gold funds. Please refer to my previous articles on advantages of investing in gold funds through SIP route.

I’ve a personal conviction that an investor would do well if he invests regularly and for long term in Indian equities. I do not share the same conviction with gold. I’m unable to have any visibility on long term price movement of gold, say for next 10 years. So please be open to the possibility that even in long term, despite averaging cost, you might end up in having a lower value.

If some of you feel that you understand gold market well and can enter it, make good gains and come out before, if and when burst happens, then try your luck.

Who knows? If some of these bullish predictions are true, you may end up even in a making a big kill!

But just be aware that what you are doing is very risky.

For an average investor, investing regularly and not committing more than 10% of one’s assets, would help him. If there is long term bullishness, he too stands to gain. If there is a burst, he would be able to minimize the losses due to averaging out of cost and appropriate asset allocation. 

Happy Akshaya Tritiya.

Posted in Gold, Media, Muthu's Musings | 1 Comment »

Gold- Some interesting thoughts

Posted by Muthu on April 14, 2011

Wishing you a very happy Tamil new year. 

There were technical glitches in the live telecast on April 12th resulting in frequent breaks and program ending before time.

There is always a next time!

Hope you would have all voted yesterday.

From 1991, I’ve not missed voting for a single assembly, parliamentary or corporation election.

Looks like, in the history of Tamilnadu, the voting percentage this time is going to be the highest ever since independence.

I don’t know who will win the elections. But election commission has already won the hearts of the people of Tamilnadu. 

Gold is always considered auspicious in many hearts. So let me touch upon the subject today.

First and foremost, I want to share an interesting data with you.

An ounce (31.10 grams or 3.9 sovereigns) of gold was priced at $19 in the year 1800.

The price was $38 in 1970. An annualized return of 0.4% if a family (for generations) has held on to gold for 170 years.

It’s current price is $1456. An annualized return of 2.59% during the last 210 years.

I’ve written before how gold prices fell from $892 per ounce in 1980 to $272 in the year 2000. A fall of around 70% in value over 20 year period.

Due to continuous bull run, the gain has been around 535% over the last 11 years.

I’m not against gold. It has a strong cultural and social need.

But it is definitely not a great investment. When there is a war or global calamity, gold has lot of utility as a medium of exchange.

When I did a program about gold in Sun TV, one client of us told me that what I say may be true for world but not for India! He challenged me that during the above period (1980 to 2000), gold has actually appreciated in value in India.

I checked the data made available in ‘Nanayam Vikatan’. As per it, the price of one sovereign (24 carats) in 1981 was Rs.1304/- and appreciated to Rs.3392/- in 2002. So the gold price while fell by 70% elsewhere actually rose by 260% (annual return of 4.44%) in India during almost a similar period.

I wondered how it is possible. Gold is a universal commodity and if there is inefficiency in pricing, arbitrage opportunities in the market would bring parity in the prices.

To be frank, I just wondered and didn’t dig it further then.

As you are aware, I keep reading a lot. It’s a daily habit. I happened to read an article recently in Moneylife by Debashsis Basu & Raj Pradhan.

While reading the same, I was able to immediately connect to the above client’s question.

One Dollar was worth Rs.8/- in 1981. Whereas the conversion rate was Rs.48/- in 2002.

There lies the answer.

Let me explain further.

When gold has depreciated by 70%, the rupee has depreciated by 600% in the same period.

So the gain we saw in the Indian market while prices fell globally was due to the depreciation in the value of rupee and strong appreciation in the value of dollar.

This further strengthened our illusion gold prices never fall.

What if the prices of gold fall again globally say by 30% and rupee conversion rate remains the same? We would also experience a fall in prices.

Again what if the gold prices fall globally and rupee strengthens, say Rs.40/- to a dollar. It would be a double whammy. The fall would be more.

Commodities like gold and silver generally have longer cycles whereas stock markets usually have shorter cycles.

This create the illusion the stock market are instable and gold is stable.

In stock markets the recovery also may be faster but in gold the recovery may be longer.

Globally it took 28 years to get the same price for gold (i.e.) the highest price reached in 1980 was again touched only in 2008. Zero return for 28 years! Adjusting for inflation, a severe loss of capital.

I honestly don’t know how long the current bull run in gold will last. All I can tell you there would be bear run followed by the bull run. As I mentioned above, both bull cycles and bear cycles may last for a very long duration unlike stock markets.

As an investment, never keep gold and silver at more than 10% of your total portfolio.

Two more interesting points I saw in the above Moneylife article.

Despite a strong bull run in gold, it has returned only 8.9% annualized return between 1991 to 2010. In the same period, Sensex has given an annualized return of 16% per annum.

Sensex has given almost double the rate of return over the above 20 year period.

Iridium or ruthenium is present up to 6% in physical gold available in unorganized gold market, resulting in impurity.

One more thing I want to add.

Even if you want to buy a gold coin or biscuit, there is a mark up price of around 5% to the actual price of the gold in the market on that particular day.

When you sell the gold coin or biscuit, there is a discount of around 5% to the prevailing market prices.

Forget about jewellery (where you loose lot more in the form of making charges and wastages), even in coin or biscuit, you end up loosing up to 10% in a two way transaction.

Buy Hallmark physical gold for social needs.

For investments, opt for a SIP route through mutual funds or buy ETFs on regular basis. The expense ratio is capped at 1.5%p.a.

Don’t make any lump sum investments in gold. Do only SIPs.

As SEBI is auditing the gold held by mutual funds / ETFs, one can be assured about the asset behind the security.

To repeat, in my opinion, it is not worth keeping more than 10% of assets in gold.

It is not a great investment option which is contrary to our popular belief.

Posted in Gold, Muthu's Musings | 3 Comments »