People say “all that glitters is not Gold” but now-a days, Gold is glittering more and investors are flocking towards gold. You see, when a user demands a particular commodity more, manufacturer line up for selling more. It is immaterial for the manufacturers whether the product is useful for the end-user or not. They will get their share of profits by selling it and distributors will get theirs. For example, if you are suffering from stomach-ache and you buy a pill that cures head-ache, Pharma Company and the chemist are at no loss. Now when Swine flu was at its peak, people demanded mask and to meet the rising demand, many lined-up to manufacture such masks.
Some time back we wrote Should Indian’s buy Gold Now ?
Investment is not much different from above examples. Way back in 1999-2000, When internet bubble or Dot- com bubble was at its peak, mutual fund manufacturers or so called Asset Management Companies came up with Technology Fund came down to as low as Rs 2. Similar thing happened in 2007 when Infrastructure and Real Estate theme was at its peak alternate New Fund success of its first fund, yes 4 infrastructure fund from 1 AMC – because you were ready to give them money. When the bubble got burst in 2008, a plain diversified fund did not lose as much as what happened with infra-related funds.
Now please don’t mis-understand this article as something against Mutual Funds. (Read Understanding Mutual Fund with different Prospective). It is same with even Insurance companies. In 2005 to 2007, they were selling ULIPs as market was in Bull Run and more than 90% of their new premium came from ULIP. In the start of 2008 when markets were at their peak, you were sold Money Plus or Future Plus and in the year 2009 when the markets were at the lowest, you were offered Jeeven Asstha which guaranteed that your money would be safe and would get doubled in 10 years. The fact of the matters is that if you would have invested in Money plus in 2009, your money would have got doubled in less than a year. (Read How LIC Wealth Plus was mis-sold)
What we are conveying is that manufacturers and distributors only want to sell whether or not it is useful for you and in case of investments, since majority of the investors make investment based on previous past performance and based on herd mentality, manufactures and distributors sell so called the TREND OF THE SEASON.
The same theory is being cooked in case of GOLD now days. Mutual Funds are launching GOLD related products Gold ETFs, International Gold Funds, GOLD based Asset allocation fund one after the other as GOLD is in demand. We all remember about Equities- December 2007 of Extreme optimism and February 2009 of extreme pessimism – what was the outcome when people took decision based on herd mentality. In 2007, they lost money and in 2009, they never made money. Today, everyone is ready to convince you that gold price will only go higher but we just want to say – gold should be small part of asset allocation and the reason of buying gold should not be rise in price. We will just give a single suggestion keep your head cool before taking investment decisions.
Research on investor psychology
The following are Google trend charts. It analyzes a portion of Google web searches to compute how many searches have been done for the terms you enter, relative to the total number of searches done on Google over time. This clearly shows that people start searching for investment which have gone higher in recent past. Check 2nd Graph of Mutual funds which peaked in December 2007 when equity markets were also at their peak. No one was searching for Mutual funds in the end of 2008 or start of 2009 when actually it was the best time to invest. Upto 2007 end when it was best time to invest in gold but no one was searching for it but when price went up, the number of searched went up.
At the end, a famous quote by legendary investor Warren Buffet- “When all the people are thinking is same direction, No one is thinking.”
So do you think one should buy gold now ?