Wednesday, July 27, 2011

Gold Rush

I bet some of you or even some of your friends might brag on their smart move for gold purchases.
And I also bet those of you who are still holding stocks for the past few months would have been thinking..."What am I thinking?" Or you might feel a little nervous at the development in the US and Eurozone. 2008 all over again? (Anyway, it wasn't that bad isn't it if it happens?)

1960s Mini Cooper S


Lets look at the chart below, Gold Prices ve KLCI (sorry, I don't have index chart for both....anyway..was I interested...)




Both charts show the prices or index for the past 1 year. As you can see, gold prices has risen from...what about $38.5/kg to ..$51.5/kg. That's a CAGR of  33.7%!. Sweeet. KLCI? 1350 to 1560 and that is 15.5%....not so good...but not bad still. So yes, if you bought gold then, you have all the right to brag...good decision. If you walk around on the street, and someone talks to you about gold and the reasons why you should buy them, they won't go far away from these:
  • It has only one direction in the long term - UP
  • Hedge against inflation
  • A safe deposit
Lets look at it one by one. First, prices appreciate in the long term. Yes. 20 years price data below shows that it DID indeed happen. So yes, they are right. But 10 years is also long term right...2001, not so right..no at all. 



Second, hedge against inflation. Lets put it about $12/kg in 1991to $51.5/kg in 2011. That gives you CAGR of about 7.9%. A pretty good if you trust government data and yea...your wealth are protected if you spending increases by that amount annually. So it is quite true then. Safe deposit, yea....if you trust your bank.

So did I bought any, YES of course, for my girlfriend as a gift...a jewellery in fact. Good investment? Hell yeah, if she is happy it is definitely good then. (although I prefer platinum or silver...looks a bit nicer)

So did I actually bought one for investment. NO. There are few reasons for that. I don't know how to value a gold. It isn't something that generates income in my pocket nor it is for itself. Okay, the market did the price. So how did the gold appreciates? Supply and demand. If demand more than supply, it appreciates and vice versa. So we know the total supply of gold in this world is finite, unlike petrol/oil where supply depreciates in a very long term. So the only way for it to appreciate is when the demand increases.

Question is where does that demand come from? Gold in fact doesn't have much economic value. Yes, it is the best conductor of electricity and heat. It is so good that it is not suitable for electricity transmission because it is too difficult to control. Heat, yes. If your car radiator is made of gold (McLaren F1 is gold plated) or your CPU heatsink is made of gold, it'll be quite cool. But aren't there a much cheaper and better solution. Yes, did I mention about price. It is too expensive to be economical enough for industrial use and considering we have much better solution why gold then. Compare to copper for example, it is cheaper and more economical for electrical transmission. Aluminium properties are good for cars. Titanium is light and strong enough for aircraft. Yes they are all same commodities but they have economics value.

1960s Mini Cooper S

So gold....they have nothing much but only good for jewellery or for palaces or cars for some madmen from the Middle East (or our politicians). Then by simple logic, gold prices should increase in tandem with the world populations (after factoring birth and death) because that is how its demand increases (sound familiar to property investors?..i'll talk about that some day). And that if, or it should be, people demand for gold. There is how I see the fundamental of gold. Other than that...it is speculative.

There is another way still. Hoarding. But like what Charlie Munger said "You are an a**hole if you did that".

1960s Mini Cooper S, a classic, a must try.

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