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Tuesday, May 7, 2013

What are the risks involved in investment of gold?

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What are the risks involved in investment of gold?

 

1. It is not an essential commodity. You cannot eat gold. If prices go beyond a point, people will just not consume it. It is not air or water.

2. Remember in the year 2008 gold lost MORE THAN 30% of value - clearly the hedge theory goes. A hedge asset SHOULD move in the other direction, not in sympathy.

3. In the 1980s gold lost about 65% of its value in about 2 years time! Remember both these events happened against a not very strong currency - the US dollar!

4. When fear subsides, and things return to normal, the law of demand and supply will apply to all assets - including gold.

5. No income generating capability: If you go wrong in a portfolio of good shares (i.e. prices have fallen!) at least you are sure of getting a 2% to 4%p.a. return in dividends.

 

This is not great, but will force lenders / investors to discount the cashflow and arrive at a new price. If the company does well, dividends will increase, forcing the value to go up. Sadly in case of gold, I have to hope that there is a GREATER FOOL THEORY and I will be able to find him, so that I can sell. This is not easy.

Happy Investing!!

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