I received a fascinating mail from Arjun Gupta of Client Associates. He is good friend and also someone who advises me personally on investing.

I thank him for allowing me to share his note with therodinhoods community:

This is the mail he sent me:

Arjun Gupta - arjungupta@clientassociates.com wrote:

Hi,

Gold has shot up from USD 300 / ounce in 1999 to USD 1720 as I write this, providing possible the highest return across different asset classes. There have been a lot of theories about this sharp movement from speculators to the debasement of the USD. As gold is a store of value conventional wisdom tells us that gold prices should be linked to inflation. But this linkage has broken down in the last 12 years as inflation has been low.

 

Theorists prove that the main source of demand in this time period has actually come from demand in emerging markets (more specifically China & India which have large pools of domestic savings). They conclude by saying that the gold price going forward is going to be highly correlated to emerging market demand.

 

Some other facts about Gold Prices

 

The enclosed file gives the gold price history in INR dating back to 1925. Here are some interesting facts and figures on the actual returns of gold over various time periods:

 

Period      

Since 1925

Since 1947

Last 50 yrs

Last 25 yrs

Last 15 yrs

Last 10 yrs

Last 5 yrs

Gold price then

18.75

88.62

119.35

2140

5160

4300

8400

Gold price today

26400

26400

26400

26400

26400

26400

26400

No of times appreciation

1408

298

221

12

5

6

3

Return

8.8%

9.3%

11.4%

10.6%

11.5%

19.9%

25.7%

 

Period

Appreciation (No of times)

Return

1930-40

1.00

7.2%

1940-50

1.75

10.7%

1950-60

0.13

1.2%

1960-70

0.65

5.1%

1970-80

6.21

21.8%

1980-90

1.41

9.2%

1990-00

0.38

3.2%

2000-10

3.20

15.4%

Gold has provided double digit returns in 3 of the last 8 decades.

Best Regards, 

Arjun Gupta, CFPCM

Partner, Client Associates
 
126 - C, 12th Floor, Mittal Court
Nariman Point
Mumbai - 400 021 

tel + 91 22 22834242 fax  + 91 22  22049303 | mobile +91 9820319090 | email arjungupta@clientassociates.com www.clientassociates.com

Winner of CNBC TV-18 Best Financial Advisors Award 2008

CELEBRATE LIFE WITH CLIENT ASSOCIATES

 

****

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Tags: Gold, Gold Returns, Gold as an investment

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Alok,

Good information and very timely :-)

We cannot predict gold prices by citing one factor alone. Also, there is hindsight bias in predicting gold prices to be going up in the next decade also. 

http://lewrockwell.com/orig13/katusa1.1.1.html 

The above blog gives more specific reasons on why Gold and Oil prices will go up in future.

In case if you are interested in seeing the rise in prices since 1925, below is a graphic. A friend on Facebook shared this with me a while back.

Before 1971 the price of gold to the USD was fixed, so all fluctuations were about the INR-USD rate. We were a much more controlled economy and went through two huge devaluations, one in 1956 and in the 60s (after the China and Pakistan wars, we had no money)

Also till the 2000s gold import was controlled so you always saw Indian prices higher than equivalent gold products bought abroad. Earlier if you went to dubai, you bought gold jewellery and wore allof it, because stuff that you wore would not be charged import duty :) Even then people would try to smuggle in gold in shoes and strange pockets and all that, and get caught (most got away though)

what I don't see here is analysis on what is the biggest driver for demand for gold that is causing the price increase?

a) People and countries wanting more gold as Fallback currency or people's "savings" taking the form of gold

b) Jewelry

c) Electronics, Medicine, etc

If its just (a) or (a) and (b), I fail to see the intrinsic value in gold, and would never be able to convince myself to buy into gold for the long term. Other than reasons linked to history (Gold standard, countries keeping reserves of gold, currencies backed by gold), is there anything else driving the demand for or value of gold? 

Perhaps my bias against jewelry is clouding my thoughts! Just want to burst a gold bubble!

Actually, to me, this could just be the longest running twisted Multi-Level-Marketing fraud gone viral. Just questioning the worthiness of the underlying item you buy (gold in this case) - the worth of which seems to be derived from increasing demand from those wanting better returns or safe returns.

One may say its like buying a different currency. Valid point. But ahhh...

There are two things that help it as a currency - first, supply is limited (only 2500 odd tons are added to supply each year, and total gold ever mined is 170,000 tons)

Second, there are not as many industrial uses of gold (as compared to silver), so it has very little non-investment related demand.

So it can be used as a currency because the 1-2% addition each year is very small, and doesn't "debase" much. Currencies on the other hand are debased regularly - take India, we are printing about 15-20% more of our currency each year! That means, in four years, we have double the number of rupees than we started off with, and that money chases approximately the same goods, so guess what, your Rs. 200 dish at the restaurant becomes Rs. 400. (There's a lag, but you know what I mean)

Gold on the other hand increases by about 1.5% a year, and since much of it is hoarded, there's not enough "velocity" and that keeps prices relatively high. The rush to gold is also a rush to safety - if, for instance, Greece decides to default and move out of the Euro, Greek bank account holders will see their entire wealth wiped out (or most of it). They can choose to a) put money in other countries like Germany, but in case Greece defaults, Germany may freeze such money or b) buy and own gold whose value er. (They are doing both, as were people in Zimbabwe during the hyperinflation there and so on)

There's nothing special about Gold. People use Real Estate like Gold, to park their money, in India and China recently and in Japan in the mid-80s. The belief is that no matter what happens the money in a piece of land is safe (tell that to People in Japan now :) )

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