Does Gold increase your wealth?

Ever considered why we pay so much for an ounce of Gold? Why brides in our weddings cover themselves from head to toe in with this metal? In short, why is Gold considered so valuable by humans? We have relied on Gold for various purposes including using it as a medium to buy and sell goods from one another.

Although other metals, such as silver and bronze, which were predominantly used for trade have diminished in value, Gold is still comparatively sold at very high prices. Such is the value of Gold that some people wear it to showcase their wealth, whereas others purchase it for the purpose of preserving or even increasing their wealth. This brings us to the purpose of our discussion for today: is Gold a good store of your value, and has our investment in Gold increased overtime?

Investing in Gold

So, let’s try to dissect whether the price of Gold has risen or fallen over the last 10 years. Are investors who bought this asset relatively better or worse off?

The price of 1 ounce (2.267 tola) of Gold in 2009 was around Rs. 60,000 and it has gone up to Rs. 155,512 as of this writing. This is an increase of almost 160%. The average rate of inflation over the last 10 years is around 8.67% (taking into account 2018’s expected inflation of 4.83%). If we were to invest Rs. 60,000 in gold in 2009, the value of our investment, assuming it grew at the rate of inflation, would have been:

= 60,000*(1.0867)10 = 137,800

This figure simply shows that we would have been neither better nor worse off, if we managed to sell Gold for this amount. However, since the price of Gold has risen to 155,512 we have made a gain in real terms of:

= 155,512 – 137,800

= Rs. 17,712 per ounce (or 2.267 tola)

Ignoring the effects of inflation, you could’ve made a return of 160%!

The following table summarizes these findings:

We just discovered that individuals who invested in Gold 10 years ago, earned a real return on average of 13%. This is quite an interesting finding that literally shouts out two very important facts:

  • Gold not only preserves your wealth, it also increases the value of your investment
  • Even in this era, Gold continues to be valued highly

Despite all kinds of assets (stocks, bonds, cryptos etc.) available at our disposal, and some of them considered as good as money, why do we continue to invest in this particular asset? To understand this very topic, lets go back in time and understand Gold’s prominent role in our history.

Gold’s role as a currency

Throughout our history, Gold was widely used as a currency to buy and sell products. Yes, you read that right! You would’ve receive Gold instead of paper if you sold a product and vice versa. Hold on! So, Gold was used as currency and now paper is used as one, isn’t there are HUGE difference between the two? We live in a funny world, don’t we? The simple answer to this question is in order to be considered “money” any object should possess the following three attributes:

  • Store of value – An object is considered true money if and only if inflation does not erode too much of its value in a short span of time. Is Pakistani rupee a good store of value? Well, that’s up to you to decide
  • Medium of exchange – if I go to a supermarket, buy a Kitkat and pay for it with a cucumber, the shop owner will most likely kick me out! In short, he will ask me for paper money in order to buy that product. That is, a currency should be used as a medium to buy and sell a product by all the members of the society
  • Unit of account – think about the time when our ancestors used the barter system to buy and sell products. It would have been a pain to quote prices in so many different currencies. 5 apples for 10 oranges or 1 biryani for 5 naans. It would have extremely difficult to do it for each and every product. However, with a common base this task becomes way easier. 5 Apples and 1 Biryani for 1 silver coin. Simple isn’t it?

It’s easy to see why paper money is considered as a currency now. It basically has all the attributes mentioned above to be considered a currency. There was also a time when Gold was extensively used as one. Prices of various goods were quoted in terms of Gold dinars. This means that Gold was considered a good store of value, a medium that was accepted by anyone who wanted to trade and a unit used for quoting prices.

Why is it not used as currency today? Well, as we have seen it is a good store of value but no longer considered a medium of exchange and seldom as a unit of account. Humans have moved away from this metal and onto paper and digital currency.

Gold’s role as a hedge

Gold is widely used by investors all over the world as a “safe haven” asset and its value almost always rises when there is a crisis of some sort. How often have you heard of top finance people come out in times of crises and ask investors to buy Gold?

One of the most prominent examples of such sort was during the mortgage crises. The price of gold rose substantially due to serious macroeconomic strains on the world economy. Moreover, the price of Gold has gone up significantly from the end of last year, particularly due to heightened tensions in the Middle-East. On the other hand, it often goes down in relatively calmer periods or in times when the global economy is experiencing strong growth.

Future trends in Gold price

Price of Gold has risen by almost 15% from in the past 1 year and forecasts indicate that it will rise further. Have a look at the following chart:

The main reasons provided for this increase and the possible continuation of this trend are:

  • Forex – Gold is valued in US dollars. Since the dollar has gone up significantly against the rupee, the price of this metal has gone up in recent months. It is expected that Rupee will go down further, thus causing a rise in the price of Gold
  • Political uncertainty – as tensions in the Middle-East continue to boil, more and more investors, and central banks in particular are hoarding gold. Several analysts expect that if these tensions continue, which they are most likely to, the price of gold will rise at a good pace in the foreseeable future
  • Demand-Supply gap – it is a widely known fact that the supply of Gold is highly restricted since most of the gold has already been dug up from the ground. A report by iforex (2016), claimed that approximately 50,000 tones of known Gold reserves are left to be dug out. On average, we dig around 2,500 tones a year, leaving us approximately 20 more years to dig out the entire known Gold reserves

All of the above reasons strongly point to the fact that Gold’s price will continue to rise in the foreseeable future. As your financial advisers, we recommend that you devote a part of your savings to invest in this particular investment alternative to protect the value of your investments. Who knows probably Gold might become the next Bitcoin?