GOLD AND SILVER AS INVESTMENTS

High investments in gold is another reason why even high salaried people with many years of long service still do not have high net worth. Historically gold and silver in India have served well as prudent investments because of their rising costs, high relevance for marriages as an absolute essential a “Streedhan” or girl’s own kitty and use as ornaments. It was not only an investment but seen as something investment plus.

Times have changed and a rethink is thus required. Wearing of jewelry has reduced as its risky and out of fashion too.Prices of gold in recent past have fallen rather than increased and are rather volatile.     

Investors bought precious metals earlier for two primary reasons. First, they hoped that prices will continue to increase (desire to gain money). Second, they believed that other investments will decrease in value (desire not to lose money).Real estate and banking was out of reach for many for various reasons and very few people had even heard of equity as an investment option and investing in equity was not easy before technology made it so. Scope to regulate and monitor better still exists though.

Beyond that, a gold coin or silver bullion sits on your shelf and collects dust. Any value it gains is independent of its existence. It's just a lump of metal. It can gain or lose value due to circumstances outside of your control. Year after year, a gold or silver coin keeps sitting around, and there's nothing you can do to affect its price.

Here is what Warren Buffets, the iconic investor behind Berkshire Hathaway said in a talk he delivered at Harvard in 1998,

"(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

The idea is simple: There is no use for gold.

“it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”

More importantly, holding gold does no value or service to the world. Value is created by producing something or giving some service. No additional value is produced by holding something of value and not making any money from it. An investment is something which pays you money.

Depending on your appetite for risk, sometimes precious metals make sense. Their prices tend to move in directions opposite of the market. If there's a market drop (like in 2008), gold prices tend to rise. You can't count on that happening, but diversifying your investments can help you avoid losing everything

Practically in India it will still take some time before people reduce their traditional attachment to gold but in the mean time except for the jewelry which ladies want to use even occasionally at weddings and other alike traditional functions and occasions, one choice is to keep the gold in pure form as deposit if you know and trust a jeweler and he is willing to give you interest on it and better still if this interest is in gold form and is compounded. Realizing the huge amount of gold with people in India Government too has offered gold bonds which give low interest but risk of keeping gold is eliminated   

Despite all the above those who still want to and keep some gold as an asset class I will recommend not more than 10% of their overall assets but more about asset allocation later in this series.