Don’t fall for misleading media articles on gold

While prime minister Narendra Modi is aiming at bolstering exports, cutting down sharply on imports and paving the way for more foreign investment, all what it takes to strengthen the rupee, certain financial institutions may not be expecting the rupee to appreciate anytime soon. In an article published in Times of India (14 April 2015), the author mentions that “while gold prices may fall in US dollar term, it is hard to lose money in rupee terms when you invest in gold due to the steady devaluation of the rupee against the dollar” The author of the article, the president of retail distribution at Religare Securites, makes a fatal assumption that every time the dollar value of gold will fall, the weakness of the rupee to the dollar will steady the price back home.

That’s not all! the article even suggests buying gold because it “still remains the most popular way in the world to hedge inflation as well as crisis.” In the past, Moneylife has analysed the precious metal in detail, and debunked these myths as gold being a hedge against inflation or a support in times of crisis.

The misleading article comes at time when investors seem to be shunning gold as an investment. Ever since the crash in gold prices in April 2013, which shocked investors world over, the number of gold exchange traded fund (ETF) folios is gradually declining. The number of gold ETF folios has declined by 20% to 0.47 million folios as in March 2015 from 0.58 million folios in April 2013.

After four years of consistent growth, trading volumes of gold ETFs in 2014 declined on the NSE and the BSE on Akshaya Tritiya, an auspicious day for buying gold and when trading volumes are the highest. NSE recorded trading volume of Rs35 crore in 2014 on Askshya Tritiya against Rs691 crore in 2013. BSE saw trading worth Rs18 crore in 2014 compared to Rs615 crore in 2013.

This is certainly not a good sign for the promoters and distributors of the financial product. Hence, there is a flourish of such articles (a few mentioned below) inducing investors to buy the speculative asset.

This is how gold reduces risk & enhances portfolio returns

A good time to invest in gold ETFs

Is this good time to invest in gold?

In nominal terms the price of gold has more than tripled in the last 20 years, despite the crash in April 2013, this makes it a very attractive asset class—with the benefit of hindsight. Many buy gold because they consider gold as a safe haven or an inflation hedge. But these are all myths as they are not supported by long term historical facts. Unlike other assets there is no way to value gold. There are many complex and global factors that affect the price of gold. And thus the value of gold cannot be decided solely by the value of the dollar and rupee.

There will be rush of gold buyers on 21 April, which marks the auspicious day of Akshaya Tritiya. It may be auspicious to buy gold on the day, but as an investor, does it pay to buy gold for the long term? Any investment in gold more than that is pure speculation on untested economic, monetary and financial theories. If you are ever tempted to ‘invest’ in gold ask yourself: What is the fair price of gold at any time; how to do you know it; when will you sell it and why?

Read our cover story on gold here - Gold Turns Cold.