“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Warren Buffett
Warren and lot of investors despise gold as an investment avenue because it produces no cash flow and very little value in terms of utility. However, throughout history and civilizations, its had enduring value on the basis of people treating it as a precious commodity.
From houeswives in India investing in gold as a hedge to inflation to more sophisticated investors buying gold on their belief that the current easy monetary policy will lead to runaway inflation in the future. Also it’s a flight to safety asset, whenever there seems to be big trouble, like this pandemic, the demand for gold as a safe haven to store wealth increases.
If you see the chart below, you’ll see that gold has done almost as well as Nifty, which is quite something given that Nifty represents top 50 companies in India. Gold also has lower drawdown.
But this chart is for the last 20 years, if you take a slightly longer period of 28 years, the US and Indian indexes have done much better than gold on absolute basis, with sharp drawdowns on gold as well.
Over a 8 year rolling return Nifty still outperforms gold by a wide margin, except there have been periods of outperformance.
So more than returns, does investing in gold provide diversification benefits such balance to our overall performance.
Correlation of Gold and Nifty stands at 0.18 over the last 20 years, but there have been periods where correlation has been negative between the two.
However, comparing the worse Nifty month return versus Gold, the latter has outperformed the former every single time. So even though at times it might be correlated to some extent, it does provide some cover in turbulent times.
This is the best monthly returns of Gold versus Nifty and in 80% of occasions, Gold has outperformed Nifty by a wide margin.
And when Nifty does well, Gold is not anywhere near.
The thing about investing in Gold is that especially in India through the Sovereign Gold Scheme, you get an additional yield of 2.5% and currently with deposit rates low, investing in Gold seems a very attractive option.
You do get the benefit of diversification and also unlike debt, it’s a hedge against inflation.
One just needs to have a long term view and not try to predict what Gold price will be 1 or 2 years from now.
A con with SGB's is that they barely trade on the markets. And the ones that are tradeable are at a discounted price. Would gold etf or fof make more sense in terms of liquidity? Or SGB adoption may increase in the future, so liquidity can be ignored for now?
[keying off of of the YouTube video at 2:45]: Warren Buffet does have an opinion on Bitcoin, obviously - and he called it "rat poison", and doubled down on it a few years later and called "rat poison squared" or something like that.