The price of gold has fallen to a two year low. Gold prices haven’t gone down like this ever in the past 30 years. Yes, you read it right. Gold prices haven’t fallen like the current fall in 30 years. I know that most of you are worried because your investments have fallen by almost 20% in the past few months and that’s a pretty big hit. In the previous article we took a look at the reason for this fall. The idea behind this article is to understand what is next for Gold and more importantly answer the question – Should you invest in Gold Now!!!
Before We Begin:
All investments have a downside and given the volatility in Gold prices, there could be a significant correction in Gold Prices in future. Please invest only if you feel you can absorb the losses, if any.
Why Should We Even Consider Investing in Gold?
One of my all-time favorite inspirations Mr. Warren Buffet always followed a simple philosophy. He considered market corrections as an opportunity to invest. He always said that, when the price of good company stocks are falling just because the market is falling, we should treat that as an opportunity and buy those stocks because the shares of a good company will always rise in the long run. Though Gold and Stocks are different like oil and water, the basic underlying philosophy holds true. I feel that this correction in price of gold is a great opportunity to invest – for the long term investor. The following are some reasons supporting my theory.
Reason 1: Gold Supplies are Limited
Gold, as you might already know, is mined and is a precious or should I say a limited resource. There is only so much gold ore present beneath the earth and at the rate we are mining this precious yellow metal out, we may run out of our gold reserves in the next 20-30 years. So, any entity that does not have an endless supply is a valuable resource and as its supply becomes limited, its value goes up.
he next few years, when Gold Mining Co’s realize that the reserves are depleting, they will have to cut-down on the amount of Gold they mine and this inevitably will result in a supply crunch and a demand rise. What would happen as a direct result of this – Gold Prices will Rise…
Reason 2: Gold Demand is not Coming Down
Even though the price of gold is going down, as I explained in the previous article, it is not because of the demand for this precious metal. The price is coming down because of excess supply and the easing inflation. So, the demand for Gold is going to continue to be strong.
Gold as an Investment - Bars & Bullion only comprises around 10% of the global gold demand. Even if investors are cautious and ignore gold bars and bullion, Other segments will continue to use/demand gold.
For ex: The demand for gold in Electronics has been steadily rising every year. A couple of years ago, the demand was close to 85 tonnes and it went up to around 90 tonnes last year and with all these hi-fi gadgets being produced like cookies, don’t expect this to come down.
The demand for gold in the Jewelry sector too has been rising every year. India isn’t the only country where the fascination for Gold Jewelry exists. In fact, in many European, African and Asian countries demand for Gold Jewelry has picked up. For as long as Man lives, his fascination for this precious yellow metal will live and I don’t think this is going to come down.
The demand for Gold in the Investment segment – Gold Bars, Bullion etc is the one that has taken a big hit in the past 6-8 weeks. This is expected to continue but I am sure that in the long run, the sustained demand in the other segments will offset this hit slowly. So, the demand for gold will be there.
Reason 3: Gold as a Hedge Against inflation – Will Not Change
For as long as Man has used the term Inflation, there is one entity that he has used as a hedge against it and that is Gold. This isn’t going to change in the future as well. Gold is and will continue to be one of the best hedges against inflation – Period…
Reason 4: This Boost in Gold Supply is only Temporary
As I explained in my article yesterday, this sudden boost in gold supply because countries like Cyprus are selling their gold reserves is only temporary. They cant keep selling forever. They can only sell a certain amount of gold and considering the demand for gold worldwide, even if all the EU Nations decide to sell a % of their gold reserves, the gold demand will gobble up the supply in a matter of 1 or 2 years. As per the World Gold Council statistics, we consumed around 4,500 Tonnes of Gold in 2012. Cyprus is planning to sell gold worth around 400 million Euros which is approx. 12 tonnes in sheer weightage as of prices in Euros today. Even if a few more EU Nations join the fray and sell their share of gold, the global demand for Gold will absorb the supply in a matter of a few months. After that, the supply will get restricted like usual and the price of Gold is bound to rise – Again.
No country will sell all its gold holdings. They will probably sell 5 or 10% of their holdings and even that I feel is a lot of selling. However, the demand is going to continue at least in the non-investment segments where gold is consumed and hence this supply will be used up pretty soon.
All in all, the signs point that this downward movement in price of gold is temporary and will start moving upwards (like what it has done in the past many many years). So, even now, Gold as an Investment is a good idea.
What Should You Do Now?
After reading this article, by now, you must have some thoughts about buying gold. That’s a good thing but, just like any investment in a volatile market, don’t come to the “All In” mode. If you want to invest let us say Rs. 5 lakhs in gold, don’t buy 5 lakhs worth of gold in one shot. Split up your purchase into smaller amounts and spread it across 6 to 12 months. Follow the SIP – Systematic Investment Plan strategy. Decide on an amount every month and buy gold for that amount only. Don’t get tempted or demotivated in case gold prices move eitherways. Stick your course and continue investment for a period of 6 or 12 months based on your choice.
As I explained above, gold prices will continue to rise in the long run. So, even if the prices go down sharply in the next few months, just take it in the stride and keep investing. You will be accumulating a lot of wealth for your future. 15 or 20 years down the line, the price of gold would have easily double or tripled when compared what it is now.
Caution: As said before, gold prices are volatile and are moving both up and down. So, do not invest in gold for your short term or even medium term cash requirements. This strategy explained above is only for the very long term investor – time frame at least 5 years or more.