Reasons to buy gold

A couple of days ago I gave you a few reasons to buy gold. Here I am giving you a few more reasons. However let me warn you that I do not have any trading interest in gold, but do have an investment interest in a company called Deccan Gold which is the only gold company listed in India. Here are the reasons:

1. According to one expert I was speaking to, the total world gold production is decreasing. I was surprised – increasing selling prices make it attractive to search so production should increase. This is what happens in theory, but it is getting to be more difficult to prospect, mine and produce gold.

2. The gestation period even for gold which is spotted is quite long. According to some experts it is as high as 10 years. Hence gold mining companies prices go up over long periods and in a lumpy kind of a fashion. If gold is found it goes up, if mining starts prices go up, if production starts – prices go up. So be careful while buying a gold mining company.

3. Chinese demand (Oh my God!) is likely to go through the roof. Very few people understand the Chinese economy. If the populace does not trust its currency, they are likely to keep their money in gold! The Chinese government had banned the population from owning gold for a very long time. Obviously once the ban gets lifted buying will start (it happened in US if you remember). It may take 2-4 years by which time the retail network to sell gold to the whole Chinese population is set up. Once it is set up, prices will boom.

4. Indian demand is difficult to predict. However there is some talk of Jewelers suicide in Kerala (with prices rising, consumption is going down, so shopkeepers are dying). However there is a huge ‘wannabe’ population which will keep buying and chase prices! Be that as it may, selling may not be enough to exceed demand – another cause for prices to go up.

5. Investment demand is high: All fresh bankers are busy selling gold mutual funds. This is a funny situation where the price is going up because the fund is buying. People are buying gold etf / regular funds which is causing gold prices to go up! Case of tiger chasing its tail.

6. Governments attitude towards gold can be foolish and slow. The rich countries which have a lot of gold (including IMF) have a pact wherein they will not sell more than 400 Tonnes a year (not sure about the figure, but it is right there somewhere). This will restrict supply on the one hand, but mutual fund demand will drive the prices.

7. Currently it is tied to the US $. Nobody n the world knows how the decoupling between the Chinese currency, dollar and the gold will happen. It will gain against other currencies – this will hurt the dollar. At some stage it will break off from the currencies and go on a secular bull run, and the trade will be guaranteed by BIS.

8. Bank relationship managers are pushing gold mutual funds, websites are screaming that gold is a good buy, people without understanding of interest, compounding, etc. think this is a great ideal This almost blind and noisy screaming will push prices high. Most fund managers are buying with a vengance !

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3 Responses to “Reasons to buy gold”

  1. Deccan Gold:
    Even though the story looks promising but there are quite a question marks on the credibility & integrity of the management.They have Indian as well as international projects-but the problem is with execution. Have nothing to show in form of progress in the last 5 years.

    What say you sir?

  2. i only was making a disclosure of interest not recommending the share. I have entry points of 9 to 22. I have exit points from 55 to 137. Need i say anything? Sometimes the market runs far ahead of itself sometimes it gets too pessimistic. Same thing for prices of gold. Again not even saying whether this is a price to buy, hold or sell. Just a delaration that i have some shares of Deccan.

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