Gold

Post recent stock market crash and then commodity and property price correction Gold is where a lot of investor found some solace. Gold has infect moved up from about 715 $/ ounce on 11 November 08, to 880 $/ ounce after flirting with a 1000 mark for some time. If you look at past movement of gold prices, it has performed well whenever there is correction in the USD. The logic is pretty simple, if the USD corrects then to buy same units of gold you need more units of USD, since USD has corrected.

Given the current economic scenario when a lot of money is being printed by the US, most of the investors believe that these trillions of Dollars infused a lot of liquidity in the system and borrowing will become cheep again, people will start buying and inflation will go up the USD will start correcting, so buy gold.

The logic's sound reasonable except if you look at the amount of money which is being pumped in the system to what is needed to clear all the sub-prime mess. The total toxic assets are expected to be around 4 trillion in US, as compared to 2 trillion which is expected to come in the system once all the fiscal packages come in the system. Off course some of the expected sub-prime money will be recovered and some of the banks may choose not to sell some of the assets they are holding, but the money being pumped is definitely not enough to wipe out all the toxic assets. Even if it is enough this will only clear the existing toxic assets held, but will not lead to consumer demand. Till consumer demand does not come back inflation will not come back.

Against which currency: currency movements are a relative term given the current economic scenario I am not sure how many currencies will do better then USD.

The other problem is high base of inflation; till last year this time, most of the commodities especially crude was at very high levels and has come down significantly since then. US is one of the biggest consumer of crude in the world and crude price correction will continue to keep inflation in US down, at least till base does not come down, which is still about six months away.

Demand-supply: The one reason why I always have a negative bias against gold is because gold can not be consumed and can only be produced. Even gold standard is scraped now so even countries can sell gold at will and continue to print currency. Also when gold prices go up retail investors tend to delay buying, in fact last time when gold prices were about 1000 $/ ounce investors in India sold their gold. Import of gold declined during that time not only in India but also in other gold importing countries like Italy, which is another large importer of gold. Now this was a surprise given the fact that India is the highest importer of gold and the yellow metal is more then just investment for them.

One must also consider the amount of gold that can be produced; I am sure we are not nearing the end of gold reserves and high gold prices and lead to more investment in exploration. Remember Hunt brothers who accumulated 50% of then silver reserves and still went bankrupt.

Gold was a fantastic investment before the gold standard was scraped, gold moved from $37 per ounce to touch a high of $850 in 10 years, and then took almost 28 years to cross the same mark. Even if you take the high of $1000 which gold touched in February 09, that’s a return of 0.6%, in real terms one is still loosing money after so many years of wait. I am sure there are better investment avenues available even in the current market scenario to invest in.