Nirav Panchmatia's Blog

The TRUTH behind GOLD

Dear Blog Readers,
It has been time that we have connected and the fault lies entirely with me that I have been too infrequent in writing on my BLOG. In fact the only complain that you all, the wonderful readers of my BLOG have with me is that I do not write every week. So here is a sincere apology and I promise to be more regular on my BLOG.
In return I would request you to keep showering your blessings, questions & promise to keep writing to me as you have been doing all along.
Many of you readers and my friends in the Media have been writing to me with queries on GOLD. I therefore decided to share some of faqs on Gold. Below is the conversation that I had with some investors on the topic of Gold. Here I am reproducing the conversation verbatim i.e. as it happened…Again,
the setting is very informal, as you would expect on such group.
Me: Good Morning. Many of you had called me to enquire on Gold. Well let’s discuss Gold Fundamentals today. On a very basic level, GOLD Prices in India are influenced by 2 very broad factors;
1. The International Price of Gold
2. FX rate ie INR USD rate
Yes. Gold prices in India are majorly influenced by INR USD FX rate. Because India does not mine (produce) any GOLD; 99% of our Gold requirement is IMPORTED.
Now tell me if you want to IMPORT something; say you want to import Apple iPhone from US; you first buy Dollars and with the dollars you will buy iphone; same logic applies to Gold too.
Now did you know that International price of Gold has practically not moved for a 28 year period from 1980 to 2008? Yes.
Gold Price was USD 850 an ounce in 1980 and it was the same in 2008. But in India Gold price moved drastically over this 28 year period.
WHY??? Why did Gold price in India move up drastically even though it did not move an inch internationally over a 28 year period from 1980 to 2008?
Investor: Due to depreciating rupee Me: Explain further…
Investor: The purchasing power of rupee decreased since 1980, which leads to increase in gold prices in India.
Me: 1 US Dollar is approx 57 today; what was 1 USD in 1980??? Anybody wanna guess??
Investor: 15?  7-8
Me: Yes. 1 USD was approx 7 to 8 INR in 1980. And it was INR 55 a year back. Now that explains the rise in GOLD prices in India. The TRUTH is that we Indians, all along have been buying DOLLARS & have been fooling ourselves that we are buying Gold. The graphic below explains the TRUTH behind GOLD in 1 slide:

Particulars

1980

Mid-2008

Early 2012

Gold Price

(USD/ounce)

$850.00

$812.00

$1,772.40

% Change

-6%

118%

Gold Price

(Rs. per tola)

Rs. 1,330.00

Rs. 12,500.00

Rs. 31,200.00

% Change

840%

150%

USD / INR

Fx rate

Rs. 7.89

Rs.  43.50

Rs.   53.36

% Change

452%

23%

Me: And YOU thought that you were buying GOLD all along??? How many Media reports highlight this TRUTH about GOLD???
Investor: On the same line…investment expert says to invest certain amount of portion of portfolio in Gold…and given the link of gold price and fx…our portfolio wud hav exposure to currency risk even though a investor is unwilling to tak ths kind of risk…right?..
Me: Gold is not an investment in the first place. It is a HEDGE against PESSIMISM. If things go bad, if economies go bad, if markets crash, GOLD shall come to your rescue. Investor: Very true
Investor: Hmm….true…if economies go bad…currency wud depreciate which would increase price of gold further. And easy liquidity of gold acts as a savior..
Me: When you are optimist about the future you buy EQUITY or STOCKS and Real Estate and when you are pessimist you buy GOLD. Now Time and situation is not constant hence we Financial Planners suggest that 10 to 15% of your portfolio should be in GOLD.
Investor: GOLD ETF or physical gold? Which one is better if economy is not doing well?
Me: That is the true reason for GOLD in ur portfolio and not as a stand- alone investment. Our ancestors preferred GOLD because it was easy to store, did not lose value, did not get oxidised , easily transferable and because they did not have better alternative like stocks and Mutual Funds.
Me: I personally prefer Gold Mutual Funds or Gold ETFs because it cannot be stolen, the mutual fund co. guarantees 99.99 purity gold, and there are no making charges and it is only in GOLD Mutual Fund that you can invest monthly via SIP that too as little as Rs. 500 per month. Does your local jeweler offer all these facilities???
Investor: No global or local jewelers would offer such a facility…
Me: By the way, Jewelry is not an Investment. Do you know why??? Investment, by defn is when you place your money today with the intention of getting back a bigger amount tom; so on the day of investment itself you have decided to sell it; Can you DARE to ask your wife to give her jewelry back to you so that you can sell it???
Me: Any takers?????????
Investor: Sir. Is it advisable to invest in e gold in Nat Spot exchange rather than gold bees?? Considering the heavy AMC charges (almost up to 1.5%)of gold bees as compared to e gold
Me: Maam. Prefer investing in Gold Mutual Funds. It is better than Gold Bees or E Gold because Gold MF is the only avenue where you can invest periodically say monthly or even weekly and an amount of your choice with minimal expense ratio. Also, since v do not know whether gold will go up or down from here, it is better to invest via SIP mode in it
Investor: I have concerned about Indian currency…continuously its depreciating against dollar…is this going to be regular scenario?
Me: Nobody knows for sure. Trust me, it is much more difficult to predict currency movement than Sensex. And every coin has 2 sides. A weak INR is bad for importer and good for exporter and vice versa…also, FIIs and NRIs will find it more attractive to invest in India if rupee depreciates.
Investor: But I guess weak currency or depreciating currency is not good sign for economy Benefits you are talking about are correct…Plus n minus points r thru
Me: Economists are confused about that too. It is not a very easy conclusion to draw. Many leading economists believe that a weak currency is actually good for the economy. The author of Breakout nation and Head of Morgan Stanley Mr. Ruchir Sharma believes so.
Investor: Could you provide link to the article of head of MS.i want to read the points tht he puts forward to support his opinion
Me: Read his book BREAKOUT NATIONS
Investor: One more question on Gold. I guess Gold Mutual Funds are funds that are invested in equities of companies, which are involved in mining etc. of gold or other precious metal. While funds like gold bees invest in gold…. am I correct?
Me: No. Gold mutual funds buy physical gold. Those funds that invest in gold mining companies are of the nature of Fund of Funds and are actually similar to Equity Sectoral Funds as they invest predominantly in Equity of Gold Mining companies. So strictly speaking, they cannot be called gold MFs. Me: When you buy gold MF you get exact exposure to gold as if you are actually buying physical gold
Investor: Okay…that answers my query Nirav. Thanks.
Investor: Can you please name one such gold mutual fund to cite an example?
Me: HDFC Gold Fund, SBI Gold Fund, Reliance Gold Fund; there are 7 to 10 such funds. They do not differ in performance much as they are all supposed to track the exact price of 99% purity Gold in India. What might differ is their Expense ratio. So choose a Gold Mutual Fund that has the lowest expense ratio & min. tracking error. Also, Crude prices and gold price increase results in rupee depreciation to a large extent, as these are India’s 2 biggest imports. This is 100% true. So govt. is right in levying import duty on gold. Indians, please stop buying more gold. V Indians r collectively getting poorer compared to other nations as v keep buying more gold and consuming more fuel. Dear Readers, hope you liked & benefitted from the above conversation. As always, shall eagerly await your comments/criticisms/opinions. As that is what keeps me going. SOUND INVESTING…

QUOTE of the DAY:

“EQUITY” (Stocks) is the new gold…


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