Ask Readers: Your views on Gold Prices

SBI Gold Fund is there as every Indian is trying to participate in the gold rush. Let me first share few facts about gold : 1. This year Gold may generate its best 1 year return in last 32 years if it will touch $2000 (In 1979 Gold went up by 127%). 2. SPDR Gold Trust is now the largest exchange traded fund in world, surpassing the SPDR S&P 500 ETF – SPDR Gold has $77.9 billion (Rs 35,05,50,00,00,000 or Rs 3.5 Lakh Crore). 3. In India assets of gold ETFs jumped 58.3% to Rs 5,568 crore by the end of June & has moved up to Rs 6,119 crore in July. The assets were only Rs 483 crore in March 2008.

So now everyone is trying to prove “Make Hay while the Sun Shines” – but will they be successful or there will sunset before they exit. Let’s try to answer 2 questions – 2nd one is more important.

1. Should you invest in SBI Gold Fund NFO?

Without keeping any suspense answer is a BIG NO. This not only applies to SBI Gold Fund NFO, but to all Mutual Fund NFOs. One should never invest in Mutual Fund New Fund Offer for few reasons:

  • Saves you from getting in herd mentality. Take the time out and go back to your asset allocation to check if the fund offers you something unique and worth allocating your money.
  • Gives you time to analyze that is it right investment for me to achieve my goals. Fancy of Gold, Craze of SIP, Advertising Campaign, Supporting views from media & a big push from agents may drive you to wrong decision.

If you would like to invest in gold funds – go for Reliance or Kotak Gold Fund which are carbon copies of SBI Gold Fund. Benefit is you will immediately get NAVs rather than waiting for couple of weeks.

2. Should you invest in Gold now?

Now this is even a bigger question & it’s not only about SBI Gold or other Gold Funds but about GOLD. Frankly saying I have no idea how to value gold or say this is the right price for gold. So let me share views expressed by our reader, other blogger & few experts.

Deepika Said on SBI Gold Fund Article

“Gold price movements is not a rocket science – When the world has excessive liquidity (more dollars), its price will go up because people now will have more money to buy that same amount of gold and when the world has less liquidity (less dollars), its price will crash because now people will have less money to buy that same amount of gold.

And if you are financially intelligent to know that how to calculate gold price in comparison to the money supply and know from the key interest rates that when the liquidity will be increased or decreased than yes….You can make fortunes from Gold Investing…..

The above advise is not for all the people. If you think that you are not financially intelligent enough than please don’t go for more than 10% gold allocation. This is a gold bubble and once the liquidity will be absorbed, it will burst. The above advise is only for those who actually know everything about US monetary base, inflation & key interest rates like Fed fund rate, prime rate…etc… and keep himself updated about all of these events.” August 25, 2011

Manshu from Onemint Says

“I’m going to sit at the sidelines as far as gold is concerned, but if you do want to buy it then buy it systematically, and don’t let it become more than 5 or 10% of your portfolio. I see a lot of folks saying very proudly how gold is the biggest component of their portfolio so even though the market has crashed they have made money, but the question is what if they are wrong about the future of gold?

What if they are wrong like the people who owned real estate stocks were wrong, and the people who owned IT stocks before them were wrong?

If you truly own so much gold, and find that prices go back to where they were two years ago – that will destroy your portfolio.

Do you really want to take that chance?” August 26, 2011

The Wall Street Journal

“Is there a gold bubble?

In one respect, gold always is in a bubble. An inert metal in every sense, gold has no intrinsic value as an asset so buyers focus primarily on its resale value. This search for the greater fool is characteristic of bubbles. Yet gold having accelerated this year, the question of whether it is now too expensive takes on new urgency.

Compared with other bubbles, gold’s rise actually looks tame. In the 10 years leading up to Aug. 22, when gold closed at a record nominal peak of $1,888.70 a troy ounce, the price had risen 587%. In comparison, crude oil rose almost tenfold in the decade preceding its all-time peak in 2008. But neither hold a candle to Nasdaq: The index climbed more than 2,000% in the tech-crazed decade that ended in March 2000.” August 27, 2011

John Paulson – the largest gold fund player

Famed gold bull Paulson held his ground with his $4.6 billion stake in the SPDR Gold Trust in the second quarter of 2011. “Paulson basically is putting his money where his mouth is. He believes that gold is earmarked to move substantially higher,” said Mark Luschini – August 16, 2011

Barclays Capital

“A developed world with slower growth, a large fiscal deficit and near zero rates over the next few years, inflationary pressures in emerging economies, and larger political and economic uncertainty bodes well for history’s oldest form of wealth (gold)” August 18, 2011

George Soros – one of the world’s smartest investor

Last year, Soros said gold was the ultimate asset bubble due to in part to low interest rates. In the first quarter, Soros sold nearly $800 million worth of shares in gold ETFs. George Soros’ hedge fund continued to scale back its investment in the world’s largest gold exchange traded fund in the second quarter, according to regulatory filings. August 16, 2011

Jim Rogers – Commodity Guru

“I do not like buying anything going straight up. I like to buy something going down. So if and when gold goes down, I hope I am smart enough to buy more and I would buy silver the same way.

There is no such thing as a safe haven investment. I wish they were. Gold went down something like 70% from its top during the 1980s and 1990s, even silver went down over 90% during its bear market in 1980s and 1990s. There is no such thing in the investment world as a safe haven. I would rather own silver than many currencies these days and would rather own gold in many currencies. But I do not want to buy gold when it is going straight up. I would rather buy something that is down rather than things that are going straight up.” August 8, 2011

Hope you enjoyed reading different views on gold. My view is “Trees do not grow to heaven” – I don’t know it is a bubble or not but if it is, gold price will come down at some point of time. That doesn’t mean gold price will not go higher from current level but do you think you will be smart enough to exit before the bubble burst?? If your answer is NO then have a proper asset allocation & if answer is YES – question is do you think you will be smart enough to exit before the bubble burst?? (Keep asking this question till you get the answer NO)

What’s your view on Gold? Write it here & comeback to see it after 1-2 years.

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{ 33 comments… add one }
  • Dr. Kousik Chakraborty August 27, 2011, 11:13 AM

    hi Hemant…nice review once again…..I dont think most of the investors are smart enough to exit before the bubble burst…so its always better for common investors to keep a distance from those gold savings SIPs..but as a common investor like me, it is always a tough job to scatter my savings to different sectors like equty MF, debt fund, ppf, bank or post office deposit..at present I am working in State Government & my gross monthly salary is 40000=00..my expence is nearly 20000…pf amount is 2600 per month…at present i can save nearly 15000 per month..can you guide me what percentage of savings(15000/month) should I invest in equty mf, ppf , debt fund….my age is 27, I have already taken two term insurance from two company( lic jeevan anmol of 10 lacs & kotak preferred term plan of 25 lacs)…thanks in advance.

  • ram August 27, 2011, 4:09 PM

    No new message in this article. Keep your gold allocation upto max 10% is a well-know concept.

    • Hemant Beniwal August 28, 2011, 12:50 PM

      Hi Ram,
      Don’t you think this is an important message + this articles was more about your views on gold prices.

      • ram August 28, 2011, 2:09 PM

        I said… there is no ‘new’ message … the message ( max upto 10% allocation in gold) is well know and conveyed several times + price (of anything) would always depend on demand & supply.. so nothing new to take away from this article.

        • Mansoor August 29, 2011, 3:30 PM

          Ram, I don’t know how to put it nicely but I will try. If you don’t extract a message from an article, you don’t have to discourage the author with negative comments. You might be one heck of a knowledgeable person but these blogs are meant for people like me who learns something new everyday. Thanks for being understanding.

  • Sanjay August 27, 2011, 11:50 PM

    The price of gold will depend on how much currency is printed by US and other countries:) I guess gold will touch/surpass 2000$ and will come to 2000$ as average price for next 10 years.
    I will surely come back after 1 or 2 years to check my prediction.

    • Hemant Beniwal August 28, 2011, 12:54 PM

      Hi Sanjay,
      I liked your confidence & the way you have written “I guess gold will touch/surpass 2000$ and will come to 2000$ as average price for next 10 years.”.

    • Paresh August 28, 2011, 3:57 PM

      I think rather generating relation between gold & paper currency,its suitable to generate it between inflation and gold.When US starts printing money,inflation in the system rises.Central banks and other big investment/hedge funds buy gold to protect their assets.There is sharp rise in Gold though demand is 17% lesser than Q2 2010.so we also can’t say that demand-supply statistics works or not.
      I think sharp price have really created problem who need to buy it for immediate purpose.E.g.marriage. and its a lesson for all that do not forget to accumulate gold systematically , independent of price over a period of time rather than waiting for a big correction.

  • Paresh August 27, 2011, 11:55 PM

    In reality peoples are in confusion..18000 was looking a high price at that time ,20,000 was also high price, 22000 was also and now it has reached to more than 26000…Investors are waiting for correction since 18,000…and as sometimes stupidity also works ,investors who have bought gold at 20-22000 levels, are enjoying the benefits ..
    I have some foreign commodity brokers online on yahoo messengers and we chat sometimes.I do not know about their credibility but most of them are still looking optimistic for next 3-5 years..

  • Mayank Gupta August 28, 2011, 12:15 PM

    Investing in equities and real estate is always preferablw

  • ANIL KUMAR KAPILA August 29, 2011, 4:36 PM

    Hi Hemant
    Yes, I have enjoyed reading different views on gold. I liked this comment-
    “I do not like buying anything going straight up. I like to buy something going down. So if and when gold goes down, I hope I am smart enough to buy more.
    Another comment-
    An inert metal in every sense, gold has no intrinsic value as an asset so buyers focus primarily on its resale value.
    I have recently read in newspaper that goldsmiths are refusing to buy gold from customers at prevailing rates.Their excuse- Their job is to sell gold and not buy gold. So the resale value of gold is also an illusion.

    • Kartavi Dave August 29, 2011, 8:28 PM

      Nice compiling work.

      Especially ” I do not like buying anything going straight up. I like to buy something going down” is the catch…. Very useful….

      It is a good time to pick good stocks / Mutual Funds (Large cap, Large and mid) systematically… repeat… systematically.

      Anil’s observation “goldsmiths are refusing to buy gold from customers” should be an eye opener for many of us.

      But do you agree that SIP in GOLDETF every month for next 10-20 years, for a known goal (not for investments) … is also to be considered ?

  • tony gomes August 30, 2011, 11:47 AM

    In India one view about Gold will always stand, since the first invention of Gold,
    keep buying Gold when you have surplus money, and do not sell it until you are in need, this has happened for generation after generation and will keep happening
    no matter what the price of Gold is.
    To me I buy Gold not for my use or as investment but for the next generation to come.
    Regards

    • ANIL KUMAR KAPILA August 30, 2011, 12:15 PM

      Hi Tony
      I have also read in a newspaper recently that a lot of Indians regularly buy gold for their daughters.The only change is that they used to buy bars or coins of 5 gms or 10 gms when the price of gold was low and now they buy 1gm or 2gms at a time.With steep hike in the price gold is now being sold in coins of 0.5 gm also. Recently people are buying gold leaves also.

  • dasarp August 30, 2011, 3:17 PM

    I second Sanjay’s observation that the price of Gold will touch $2500-$3000 , but my guess is – it should happen even earlier – within the next 3- 5 years!

    The economies of most countries in Europe & America isnt good. It will be interesting to watch out for rates of the various currencies. Euro may not even exist- what with the PIGS (portugal, Ireland, Greece, Spain) in debt & England ,Germany not bailing them out . Countries like Switzerland (a safe haven to unaccounted money ) will have a gala time enjoying the fruits of money in their custody!

    Also to watch is the U S of A which has printed a large pile of its currency called Dollars.

    This will lead to even governments holding to precious metals like Gold .

    My suggestion is it is best to invest in Gold .

    • ANIL KUMAR KAPILA August 30, 2011, 6:10 PM

      Hi Dasrap
      I agree that there is a place for gold in portfolio.But gold should be purchased in a sytstematic manner and the exposure to gold should not be more than 10% in the portfolio.

  • pomie September 2, 2011, 7:14 PM

    Hi Hemant,
    I used to purchase 2 units of gold etf every month.But once the price of gold crossed 2500 per gram/unit,i have stopped purchased gold eft units as it exceeds my limit of 5000 per month.I am not sure as what I should do,should I still go ahead and buy 2 units per month irrespective of the price(and violate my budget of 5000 per month) or wait until the gold euphoria settles down or should I go ahead and open a 5000 rupees SIP in Reliance Gold Savings fund ?
    I still need to accumulate 100 to 200 units of gold etf over a period of 10 years down the line ? Let me know your suggestions ?

    Thanks,
    Pramod

    • Hemant Beniwal September 17, 2011, 10:16 PM

      Hi Pomie,
      Increasing amount will be bad idea – SIP means same amount every month. But if you are serious about accumulating gold on regular basis you can buy units on quarterly basis. 🙂

  • KARTHIKEYAN September 15, 2011, 1:34 PM

    Dear Sir,

    Thanks for time in reading my question. I would like to invest in gold. I am confused to go for which Gold ETF, since many are available in the market. Could you help me with your valuable answers please. Thank you

    Regards,
    Karthikeyan R

    • Hemant Beniwal September 17, 2011, 10:19 PM

      Hi Karthikeyan,
      Go with fund which has maximum trading volumes. Try Goldman Gold ETF (earlier Benchmark).

  • reema gupta October 19, 2011, 1:58 PM

    Hi hemant,
    I started to invest 2000/m in icici prucendial regular gold saving through sip.could you tel me hows is this?

    • ANIL KUMAR KAPILA October 21, 2011, 4:45 PM

      Hi Reema
      Do you have investment in diversified equity mutual funds? If yes how much?

  • reema gupta October 22, 2011, 8:06 PM

    Hi anil,
    Thanks for replying me.my age is 25 years.i have hdfc top 200,hdfc prucedencial fund.i invest 1000/m in both of these fund from last month.inspite of these ,i have
    1-icici gold saving fund-2000/m
    2-reliance super invest assure plan-10000/anualy from last three year.i have this plan for 15 years.
    i am new invester.i dnt have any idea anil ji,weither i am going right or wro

  • ANIL KUMAR KAPILA October 23, 2011, 6:59 AM

    Hi Reema
    The most important thing for a new investor to understand is the concept of asset allocation. Never put all your eggs in one basket. One must have proper asset allocation in different asset classes like debt, equity, gold to diversify and spread risk. Typical asset allocation is 30% debt, 60% equity and 10% gold. You also must have diversification across funds and fund houses.
    Never mix insurance and investments. ULIPs are very costly instruments and must be avoided.

  • reema gupta October 23, 2011, 9:53 AM

    Hi anil,
    So many thanks for replying me.please tell me,hows my portfolio.what should i add more so that i could get a good return.

    • ANIL KUMAR KAPILA October 23, 2011, 9:02 PM

      Hi Reema
      What is your investment horizon and how much you can invest per month?

  • reema gupta October 24, 2011, 6:24 AM

    Hi anil,
    i can invest 7000 thousand per month.my goal is 50 lakh after 15 years.now i giving
    1-hdfc top 200-1000/m
    2-hdfc prucedential-1000/m
    3-icici gold saving fund-2000/m
    4-reliance super invest assure plan-10000/anuaaly.will my portforlio help me to acheive my goal or i should add more?
    2

  • ANIL KUMAR KAPILA October 24, 2011, 11:47 AM

    Hi Reema
    I have already mentioned that investment and insurance should not be mixed. I don’t understand your purpose of investing in Reliance scheme. You should go for term insurance if you have dependents.
    To meet your goal you should invest only in diversified equity funds. Moreover you should not have more than one scheme of the same fund house. You can invest in one large cap fund, one muticap fund and one mid and small cap fund. Before selecting a fund see its track record. You can refer to the post – Best Mutual Fund For SIP.

  • reema gupta October 25, 2011, 8:07 AM

    Thanks a lot anil…:-)

    • ANIL KUMAR KAPILA October 25, 2011, 3:56 PM

      You are welcome Reema.

  • ANIL KUMAR KAPILA October 26, 2011, 5:43 PM

    Hi Hemant
    Indians are lapping up gold very enthusiastically.India is the largest gold consumer in the world.Its appetite for the yellow metal seems insatiable. Every year the import of old in the country is increasing. In spite of runaway increase in gold prices gold imports do not show any indication of decline. This perhaps is the most compelling evidence in favour of robust domestic demand growth.

  • moin November 24, 2011, 8:36 PM

    greetings.

    what are the tax implications if gold savings fund is redeemed after 3 years for a NRI?

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