Mukul met me on the golf course and asked me, “I have been buying units of Gold Exchange Traded Funds (Gold ETFs) as an investment. Isn’t it a good idea ?”
When it comes to financial health of faujis, I am pretty poor at diplomatic statements, so I told him , “If your purpose is to buy jewelry for Mrs Goswami, then directly buy that and let her be happy, for in her happiness lies your happiness, too. But in case you are investing in Gold ETFs purely as an investment then I’d rather prefer stocks and real estate.” I clarified to him that it was a suboptimal investment and he should stop buying Gold ETFs.
As an investment, I never recommend gold or gold ETFs for anyone. The purpose of gold since times of Cleopatra is to adorn. Especially, in Indian context gold was used by our fore fathers as a security which could be mortgaged in times of distress. Today, none of us are in a situation, where we have to mortgage gold. And in case we are in such a situation financially, it implies that we do not have an investible surplus. A household can only look at investment options once it has a cash surplus after all its expenditures are met. And if you have no surplus, why read investment advice.
Gold gets its name from the Latin Aurum which means gold. It is a chemical element which is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. One of the oldest civilizations, the Sumerians of Mesopotamia, who lived in what is modern-day Iran and Iraq, first used gold as sacred, ornamental, and decorative instrument in the fifth millennium B.C. The early Egyptians used gold primarily for personal adornment, rather than for monetary purposes, although the kings of the fourth to sixth dynasties (c. 2700 – 2270 B.C.) did issue some gold coins.
The first large-scale, private issuance of pure gold coins was under King Croesus (560-546 B.C.), the ruler of ancient Lydia, modern-day western Turkey. Stamped with his royal emblem of the facing heads of a lion and a bull, these first known coins eventually became the standard of exchange for worldwide trade and commerce.
Gold is traditionally weighed in Troy Ounces (= 31.1035 grams). It has a specific gravity of 19.3, meaning that it is 19.3 times heavier than water.
As of 2009, a total of 165,000 tonnes of gold has been mined in human history. This is roughly equivalent to 5.3 billion troy ounces or, in terms of volume, about 8500 cubic metres. To visualize, it would be easier, if I were to say that if we make a cube of the entire production of gold in the world since its mining began till date, it will fit into a basketball court which has a 19.46m high roof. And most of it is stored in lockers or is worn by people. The world consumption of new gold produced is about 50% in jewelry, 40% in investments and 10% in industry.
There are two traditional forms of investments in gold: jewelry and coins/biscuits. A new form of option has emerged these days and that is Gold ETF. They are mutual fund schemes, listed on the stock exchanges and traded like shares. The pooled amount is invested in the physical gold. An investor can invest as little as Rs100 and buy pro-rata units. When redeeming the units, investor can go to the fund house or sell in the stock market and get them converted into cash at the prevailing price of gold. The NAV of the units is linked to the price of gold in the market. Gold ETFs are proving to be an easier and safer mode to buy gold. The gold can be accessed electronically and need not be kept in safes. That is the only advantage of a gold ETF. But when you compare returns, they are not comparable to real estate or shares. A comparative table of returns from various asset classes can be accessed from one of my earlier blogs on best asset class to invest.
To quote Buffett, “If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll still have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could buy the Dow Jones for 66 at the start of 1900. Gold was then $20. At the end of the century, Dow Jones was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will always kill an unproductive asset.”