THERE are many reasons to buy Gold and hold it. Gold as a hedge in your portfolio works, but works only over a long period of time. If you buy gold because it has been going up, it would be a wrong reason to buy. However, the fact is, it may still go up – but don't expect to get 36 per cent Compound Annual Growth Rate (CAGR), that will not happen, for sure.
There are also many reasons why you shouldn't hold gold. One reason not to own gold is the recent phenomenon in its price. For example if you had invested in gold in 1980 (USD 590) today it would be worth about USD 1055! Not much if you consider inflation, is it? As against the Sensex which has gone from 100 to about 17,100. And the shares would have paid you nice dividends for holding the shares!
That said, here are 13 reasons why it's a good idea to own gold:
1. Global currencies are at an imbalance
USD is not the only currency which is in bad shape. In fact, most currencies are at quite an imbalance with each other. So if you do not know whether to hold your money in rupees, lira, yen, dollar, euro or pounds; choose gold. So, clearly as much of cash you will keep in your portfolio is the amount of gold you should be having.
2. Investment demand for gold is accelerating
Yes, many people are touting this as a great hedge. They prove this by checking the trend for a period of three years. Fantastic! But if you check the trend for over a 10 year period, it will fail and fail miserably. What is surprising is that bank relationship managers are now selling gold mutual funds – they will keep selling to keep their jobs. These mutual funds will keep buying gold. So, it is a self fulfilling prophesies.
3. Printing currencies
Ben Bernanke is converting all the forest in the US into currency! Most Central Bank heads are printing too much currency ever since the gold system failed. Thankfully, they cannot create gold.
Also read: Should I buy physical gold or opt for funds
4. Huge supply and demand gap
India and China will continue to buy gold, as will many other users!
5. Declining interest rates
Interest rates are more likely to decline, than rise, internationally, adjusted to inflation.
6. Decreasing gold production
According to one expert I was speaking to, the total world gold production is decreasing. I was surprised! Increasing selling prices make it attractive to search, so production should increase. This is what happens in theory, but it is getting to be more difficult to prospect, mine and produce gold.
7. 10-year long gestation period
The gestation period even for gold which is spotted is quite long. According to some experts it is as high as 10 years. So, gold mining companies prices go up over long periods and in a lumpy kind of a fashion. If gold is found, prices go up. If mining starts, prices go up. If production starts, prices go up. So be careful while buying a share of a gold mining company.
NEXT PAGE: More reasons why you should hold gold
Also read: PV Subramanyam's blog
Photograph: Vipurva Parekh
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