Investment in Gold during price fall – Good or Bad?

Given that the Gold prices are falling recently, is it a better option to invest in Gold now? The answer is are you looking at Gold as a short term investment or a long term one. For the near future one can never be sure whether the Gold prices will further go down or will they move up. But in the long term and very long term, Gold will always help you during an economic crisis and give good returns. Here’s why.

Gold prices usually go down during good times of the global economy as big investors will be investing in stocks and shares of well performing companies. During the good times, it is only the consumer appetite which contributes for an increase in the Gold prices. However in bad times of global economy, the Gold prices will go up as big investors will be taking their money out of stocks and shares, and will be investing back in Gold. The recent economic crisis in the west caused a huge increase in Gold prices in the past few years. In fact Gold prices have increased 500% in the past 10-12 years.

Reason for recent fall Gold Prices

Then why did the Gold prices fall so sharply in the past few days? We know that the economic crisis is not yet over in Europe.

Well, the reason for this quick fall in Gold prices recently is

  1. Gold prices started falling the same day ie on April 10 when Cyprus, a European nation facing sever economic crisis announced that it will be selling 10 tonnes of its Gold to pay its national debt.
  2. There are speculations that even other European countries which are facing economic crisis would start selling their Gold as well
  3. According to former US assistant treasury secretary Paul Craig Roberts, the present fall in Gold prices is because of a desperate effort by the US Federal Reserve to scare people away from gold and silver and buy US dollar instead to increase the value of US dollar. Read about The Assault On Gold.
  4. This is then compounded by the decreasing economic growth in China, which has led to a decreased demand from China – which is one of the biggest consumers of Gold in the world today.

Is it a good choice to invest in Gold now?

Gold is always a good investment which can bail you out in two types of economic crisis.

The first is personal economic crisis, where in Gold can come handy. It is both easy to quickly sell Gold (unlike say Diamonds) and get liquid cash and Gold prices always beat the inflation in long term which makes it a low risk investment.

The second is global economic crisis, which when happens might also affect one’s personal economy. And during this crisis, investors who earlier used to invest in stocks will turn back to Gold as a safer investment, which in turn will lead to increase in Gold prices during a global economic crisis. Which means you can then sell Gold at even better prices during such a global economic crisis.

The only place where you need to worry about Gold prices falling down is if you invest for short term, and you end up in a personal economic crisis and co-incidentally Gold prices went down during that period. Note that Gold prices go down for a short period always when global economy is doing very well, because investors then would be investing on stocks and shares instead of Gold.

So invest in Gold if you are looking at a long term investment and have enough cash in case of an economic crisis in the short term. Even the cash can be invested in the form of Fixed Deposits as banks today offer good interest on FD.

How is the demand for Gold in the long term? Why will the Gold prices increase in the long term?

Gold – Limited Supply

Look at the availability of Gold. Gold is not something which can be manufactured in factories. There are limited Gold mines across the world, it is not a renewable resource, and at present mining of Gold has become a very expensive process with mines getting very little returns.

Gold – Increasing Demand

The human population is ever increasing, the demand for available Gold both for personal and public investment is increasing as well. The demand for Gold in industrial and jewellery use would also go up in the long term compared to present demand. After all, there will be more industries and people in the future, and they need Gold as well.

And then there are countries who are moving away from a dollar based economy, because the value of US dollar is not backed by anything. So countries have been diluting their dollar reserves and have started investing in Gold. So this would increase the demand for Gold as well in the long run.

US itself has the world’s largest Gold reserves in its federal banks. Over 75% of US foreign reserves (over 8000 tonnes) is in Gold. Why would US own so much of Gold if it were not a good investment?

 To buy Gold or not

So my suggestion would be always to have liquid cash to be useful in case of a near term economic crisis, and invest in Gold as a long term investment, because it is a very low risk investment for the kind of returns you get. Gold prices do not fall like stock prices, one company’s stocks might be great performers today, and tomorrow it will be some other company, but for Gold there is no alternative, and so there is no need for you to worry about which Gold to invest in. Unlike in case of shares where in you will have to do good research on which shares to invest and also constantly watch the market to sell of your shares before the share prices of the company goes down. Gold is the natural choice for a layman’s investment who does not want to worry about the share market.

If somebody says that Gold is not a good investment then ask them, why big investors invest in Gold and why countries have a significant portion of their foreign reserves in Gold? It was our Gold reserves which saved us during the 1990s economic crisis before India opened up its economy. For ages Gold has been the first thing that comes to our help during a personal economic crisis. After all it was Gold which was used to manufacture currency initially. The current paper currency actually has no real value in terms of solid backing. If the economy of a country goes for a toss, so does the value of its paper currency. Paper currency cannot even protect you against inflation, what costs 10 Rupees a few years back, is costing 100 Rupees today, so if you had kept your 10 Rs as is during all these years, then it means you are under a loss of 1000%! All the reserve banks guarantee is that the currency note carries a value of n Rupees, no assurance is given about what that ‘n’ can buy you, not even minimum assurance. Read about the true value of a currency note

Is Real Estate a Good Invesment? Benefits of buying Gold over Real Estate

Yes you can also invest in real estate (by which I mean in land, not in flats which have no land value). But its easy to convert Gold to liquid cash in terms of crisis than to sell real estate. Also you can sell a fraction of your Gold investment as and when required, which you cannot do with your real estate investment.

You can also buy Gold in any amounts as and when you can, which adds up in the long term. But you cannot buy 10 sq ft of land today, another 10 sq feet a month later, etc. Also, for a real estate purchase, given the huge amount required, you almost always have to take a loan, and also be careful about where to invest as land value in long term varies from one place to another. But this is not the case with Gold.

But always remember that the best investment Mantra is to balance your investments by not putting all  your eggs in the same basket. Nobody can accurately predict the future trends in the economy. But a balanced investment across different sectors will definitely help.

  • Have sufficient liquid cash for an emergency economic crisis.
  • Invest in fixed deposits which is also a risk free investment since nowadays you get good interest on it from the banks
  • Invest in Gold as a long term investment.
  • If possible own a piece of real estate. My suggestion if you are looking at real estate as an investment would be to invest in places which are in the outskirts of the current heavy growth areas. Do not invest in real estate as an investment in places where the prices are already high, invest in those places where the prices are currently normal or low which usually are in the outskirts of big cities, and where the prices would go up in the next 5-10 years due to organic growth.

Remember that nobody can accurately predict the trends of future economy, but you can always stay above others during an economic crisis if you do a well balanced investment across different options. And finally note that what has been said here is not a professional advice, but merely my opinion based on my experience and what I know  :)

  • Zed

    what are your thoughts about buying physical gold vs. invest in gold based assets (e.g. GLD)?

  • swagatika

    dear gurudev, many many thanks for a wonderful explanation. one doubt. you had given the benefit of gold for the common people. if in terms of indian economy is it good or bad if gold price is down. if gold price is down normal person can buy gold. what happens when every one buys gold.

    • itzguru

      Prices of any commodity will always increase if there is more demand against the supply. Gold is used in jewellery which everybody want, its used by investors, in industries, in country’s reserves, etc. So Gold always has more demand, especially considering it cannot be printed like money. So Gold prices will never go down so much that everybody will be able to buy it. Especially in India, there will be always be a huge demand for Gold as people continue to buy it. The moment prices come down, people start buying it for jewellery, wedding, etc. Every time a festival approaches people start buying Gold and Silver. So there is always great demand for Gold.

      The plus point of its price going up regularly is that in a country like India where there is always inflation (rise in price of commodities), Gold helps one invest their money easily as a low risk shield against inflation.

      Coming to whether it is good or bad for economy, in India most of the gold mines have dried up, so almost all our Gold today is imported from outside. What this means is that the country has to spend more dollars to buy this Gold. So this puts a pressure on our country’s foreign exchange reserves because it loses that many dollars spent to buy Gold. We need dollars because we import a lot of petroleum and if we dont have dollars then we cant buy petroleum products. So government always tries to discourage buying of Gold and puts various kinds of taxes.

      But in my opinion, this is not the solution. People should be allowed to buy what they want. Can we stop people from using cars and buses because we have to import petroleum from outside? Instead we should try to create an economy where we export whatever we are good at, and make more dollars than what is required for our imports. The government needs to concentrate on encouraging more manufacturing industries and give competition to Chinese products, to encourage better agricultural output, to encourage home grown defense industries as we are also spending a huge amount in importing defense equipment etc.

      After all, the more Gold comes in, the better for the country in the long run. And Indians have always been great buyers of Gold. There is no better gift than a Gold article gift in India :)