Wednesday, April 24, 2013

Gold Prices and inflation

Hmmm.. was actually replying to a comment and turns out that this requires a post in itself :)
Gold prices are fascinating.


These were prices in USD vs prices in INR - and that's when you figure out why Indians are so anal about purchasing gold; it has, for a long time, protected against inflation.

In 1930 gold prices were INR 18 per 10 grams - now at 26000 per 10 grams. That is a 82 year CAGR of 9.3%. Sounds fancy, but inflation in India has been easily north of 7% because of the country's socialist philosophy.
For the same period, the US has done 5.5% compounded against a US inflation of 3-4% odd.
So, in the long run - really long run - gold is a good hedge against inflation; but all of that is very dependent on the price at which one buys gold, and hence Indians, in general, buy a little gold every year.

A ridiculous story showcasing a glimpse into how much Indians adore gold and the gods.

Anyway, this post is not about speculation.

Regarding the current price of gold - going back to my last post - nobody can justify a price for gold. But one can justify a price move; oddly, a crisis can take the price higher, but higher from where?

If gold moves from USD 1500 to 1200 to 2000 - the last move because of a crisis - does that make it a good investment or good speculation.

And going to my older post, speculation in gold is fine and treating it as an insurance policy (that may not pay out) is fine but fondle it all you want and it wont respond. For a larger chunk of one's portfolio, cash flow producing assets are always the better option provided they are bought at a reasonable price.

Enough of this humdrum. Time to close this post.


  1. In an economic crisis, I think gold is the best investment you can ever choose. Thanks for this informative post.

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  2. Tirath I do agree with you that gold is not an investment. For me I think it is an insurance policy. I think people should NOT have more than 5% of their portfolios in precious metals (gold + silver). However, they should always take physical delivery when they buy (not play in ETFs or contracts). In the current world economic climate, I think gold still has alot of room to move up. The only thing that would put significant downward pressure on gold price would be a meaningful rise in interest rates, especially in the United States.

  3. An insurance policy would be buying Berkshire ;)