Is this the right time to buy gold?

by Manshu on April 16, 2013

in Opinion

Gold has had the worst day today in 30 years as it tumbled 8.7% in a single day. There are several things that you need to consider about gold, but before you read any further, you need to consider how bad my record with gold price predictions has been. I said that you should stay away from gold as early as March 2009 but if you had stayed away from gold for the last 4 years as I did that would have been bad for you as gold has grown quite a bit in that time.

GOLDBEES which is a popular Indian Gold ETF has grown almost 109% in the last 5 years, and at a CAGR of almost 16% that’s not bad at all.

2013 hasn’t been good for it though as it has gone down by 13.5% so far this calendar year, and it has gone down by 8% in the last 12 months or so, and it also looks like 2013 can be the first calendar year where gold returns could be negative when priced in INR.

I won’t be surprised by this and in fact if you read what I have written earlier it will be quite consistent with what I have been saying about gold over the past few years.

The main reason I’m not too bought into the gold theme is that every one is harping on the same story, and people are buying it because of all the same reasons. Everyone talks about central banks printing money, currencies getting debased and gold rising as a result. There is too much consensus and too many people talking the same language. That’s usually not a good sign, and portends bad days ahead. That’s what happened before when real estate stocks came down, same thing happened with infrastructure stocks, IT stocks, and perhaps even Tulips.

More than anything else this seems like a greater fool play where everyone is buying gold with the hope that someone else will be willing to buy it at a higher price a few months down the line. That has worked in the past, but I can’t see how that can work forever.

I’ve seen some very influential investors, and bloggers write about how they have the bulk of their portfolio in gold but I haven’t seen many updates from them to see what they are doing now that gold is trading down?

If you really had 40 – 50% of your portfolio in gold, you’re surely looking at tough times, and with the margin for gold and silver increased in the international markets, it should see some tough times going ahead as well.

I personally don’t feel that this is a good time to buy gold, and on the contrary, if you are sitting on big profits from your gold trade that has worked for the past few years, I’d say it is a good idea to book some of those profits, so that if the fall continues, not all of your profits are nullified.

Most importantly, view gold as any other asset, it’s not a hedge against inflation, and it is certainly not a safe haven, it’s just another asset that goes up and goes down, and if you have too much of your money tied into it – then you are well advised to diversify and reduce your exposure to it.

Also, I see some parallels here for the Indian real estate market. People say that real estate won’t go down because it has never gone down in the past, and guess where you have heard that argument before?

I probably don’t need to repeat this to regular readers, but it’s my duty to remind you that you shouldn’t take investment advice from random bloggers on the internet – your’s truly included.

{ 23 comments… read them below or add one }

mukesh April 16, 2013 at 9:59 AM

apart from the ‘investment schemes’ in gold,should we buy it now as a like ‘wedding or occasional’ ornament???i mean ofcos we will wait for more reduction bt is it good to have gold??listen am not sayin i’l invest here..

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Manshu April 16, 2013 at 8:33 PM

Jewelry is not really an investment is it? You incur so much loss in making charges when you sell it that a lot of the rise in price is canceled out there itself. Jewelry is really a consumption item much like a car I feel.

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Shiv Kukreja April 16, 2013 at 10:11 AM

I think it is not the best of times to invest in Gold, but one of the best times to invest in Equities for sure and good time to invest in Income Funds/Gilt Funds as well. Gold bubble has bursted and Real Estate bubble in India will also have the same fate in majority of the areas, it is just a matter of time. If I am not wrong, I think it has already started in some pockets.

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harineem April 16, 2013 at 3:06 PM

Equities with what hope? Inflation,bad governance and falling profits!

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Shiv Kukreja April 16, 2013 at 6:27 PM

All asset classes including Equities follow certain cycles. I think gold and real estate as investment classes are already in a bubble zone. That leaves equities and fixed income for me to invest. Inflation has already started falling and so should interest rates, sooner or later. Year-end figures show fiscal deficit should remain under control this year. With falling gold & crude oil prices, India’s imports should be lower and thus India’s current account deficit should also be lower.

Now, it is government’s job to start boosting confidence of the corporate world by fastening the pace of its decisions & project clearances. Bad politics, resulting into bad economics, will hurt the UPA government the most and if its top leaders like Sonia Gandhi, Manmohan Singh, Rahul Gandhi, P Chidambaram etc. are not realising it, they are digging grave for this government themselves. They should very well understand it that if they fail to perform this year, they’ll not be able to make a comeback for many many years to come.

Things will not be so smooth, but opportunity lies with equity investments only.

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Manshu April 16, 2013 at 8:53 PM

The more I think about this, the more I feel that simply doing a SIP won’t work any longer. People will have to be smart about taking advantage of sharp falls in equities and sell them when the market is a bit bubbly. This of course is not for everyone, and I’m beginning to think that not everyone in India should have equities in their portfolio.

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Kartavi April 17, 2013 at 7:37 PM

Nice post again… but scarified on this comment.

Majority people are salaried- middle class- servicing- people . They never understand “sharp falls in equities” and never able to sell in appropriate time. Hence they are advised to go for SIP in MF . On reading “Simply doing a SIP won’t work any longer”, they must be crying out … Oh My God ! Please tell, how and why ?

Now see the position….

FD cannot beat the inflation.

Gold and House-property are, now, not good for investment.

Equities ….OMG !

Then there is only one option… EQUITY SIP IN MF Which would also now not going to work any longer.

Now tell Manshu, kare to kya kare ?

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Manshu April 18, 2013 at 12:48 AM

This is just my opinion and is largely shaped by what I have seen work, and that for me has been buying heavily when the market falls and there is panic, and then waiting it out when the times are good.

I don’t know if everyone can do this or if everyone needs to do this, and if just a SIP has worked for you till now, I guess it will work in the future as well.

But if it hasn’t then you need to change your strategy, and buying heavily in crisis can be one part of it.

I”ll be interested to hear how your equity investments have done over the years Kartavi?

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Kartavi April 20, 2013 at 6:53 PM

Sorry, bit late to respond.

I have equity investments for Rs. 50K (done at 2007-08 and Sep-11) and Current Market Value is 39K !

I could never be able to identify the crisis time to buy heavily. And hence in between and thereafter, I had not invested directly but through SIP (with retirement saving purpose).

SIP in 4 categories since Nov-11 (HDFC prudence, ICICI Focused Blue Chip, IDFC premier Equity and Reliance equity Opportunity) has given average return of 9% which is near to the prevailing Bank FD rates.

Further, since 2011 I have GOLD ETF SIP (purpose- for family function after 10 years, not investment) which is giving negative return after recent fall.

I am feeling that My investments are not beating the inflation.

But… what to do ?

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Manshu April 20, 2013 at 9:07 PM

Kartavi, I think in your case the losses exist because you stopped your SIP after 2008 – perhaps at September or October when the market crashed? Is that correct? I say that because at that time stocks were quite low and I think if you had continued the SIP you would be positive at least today.

And I think perhaps the same thing with gold, you started the SIP after gold had already risen quite a bit. If I were in your place, I would start an equity SIP the next time there is a lot of crisis and panic in the market and stocks are down heavily. I am not sure what to do about the gold ETF really.

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harineem April 22, 2013 at 4:31 PM

This is a very scary statement for me because I have been active in SIPs and they are already down. Equities I have tried and tried end result is no significant gain at all.
If MFs also are not reliable, simply no hope for common investors like me

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Manshu April 22, 2013 at 9:21 PM

I am just saying what has worked for me and maybe it is not right for me to say that nothing else will work but then what I have done is not all that hard. Do you think you will be able to buy equities aggressively when the next panic hits the market? That is the essence of what I’ve done over the years and what I meant to convey here.

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harineem April 24, 2013 at 11:35 AM

I can buy Manshu but how to decide what to pick.I know you did an article on how you pick.Reliance used to be one of the trusty ones even that has become unpredictable.Can you recommend any sites which help with analysis?

Thanks

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harineem April 24, 2013 at 1:20 PM

I just reread your article, what sites give you high dividend yield stocks? In general can you recommend any site apart from Moneycontrol.
Thanks

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Manshu April 24, 2013 at 8:52 PM

As far as I know there is no site that lists out high dividend stocks, I remember doing that research myself looking at each share individually on the BSE website. I really don’t know that you need to look for any stock specific websites, what you need is articles about companies that are doing well and that can be found everywhere.

I will try to come up with a list of blogs that write about stock picking in India in the future and that may be of use too.

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Manshu April 24, 2013 at 9:01 PM

In the beginning it is better to stick to mutual funds Harinee, and focus on large cap funds when the market is in crisis and there is panic. At that point the harder thing is to just buy and as long as the company doesn’t go bust, you will come up ahead in a few years.

Being in a mutual fund has the advantage that you don’t have to worry about any individual stock and whether you have made a mistake, and I think that is a better way to start than to pick stocks when there is panic all around.

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Rahul April 16, 2013 at 4:26 PM

Well I hope you’re right about Real Estate as I’m thinking of buying a property in near future. 😉 In NCR, the supply has visibly outclassed the demand for houses. There’s just too much half-hearted development going on. If that’s not a sign of bubble, I don’t know what is. I’m just keeping my fingers crossed that massive FDI inflows don’t aid the realtors from going belly up.

As for equities, I’m still reeling from Suzlon shock! :O
For now, only MF’s, PPF, FD and Guaranteed Saving Bonds for me 😀

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Manshu April 16, 2013 at 8:34 PM

I just don’t see how this is sustainable, and that’s pretty much the big factor when I say that the real estate market will cool down. At some point everyone is just going to be willing to wait it out and rent instead of taking ridiculous amounts of EMIs that strain all their finances.

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Manshu April 16, 2013 at 8:55 PM

Also, about Suzlon, it had a lot of promoter stock pledged, which is a big red flag as I’ve written here before.

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Rahul April 17, 2013 at 6:20 PM

I agree. Just today’s headline in NCR section in HT – “Developers sitting on 1.4 lakh houses in NCR. More than one-fourth of the 5.2 lakh hosing stocks being constructed remain unsold due to weak demand”.
Btw, what support levels do you see for Gold in the current market?

Interesting point on promoter stock pledged. Need to read more on that to understand what it really means. Would appreciate a link of your post where you wrote about that.

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Manshu April 18, 2013 at 12:58 AM

Here is my older post on promoter pledges, and you will be interested to see that Suzlon is the example that I took in that post. I don’t really know what a support level for gold could be and I don’t believe anyone else who says they know it either. How do you have something like gold? Based on P/E, DCF, BV what?

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Rahul April 18, 2013 at 1:43 PM

Thanks but the link is missing.
If I remember correctly, resistance levels for commodities are usually calculated using the concept of Pivot Points. Don’t have a deeper insight on that though.

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Manshu April 18, 2013 at 8:00 PM

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