In today’s economy, few asset classes polarise people and markets like gold does. For some, it is the absolute store of value that can save their sinking financial ship, standing tall even if the the global financial system collapses. For others, it is nothing more than a barbarous relic — the great economist John Maynard Keynes called it a non-yielding, non-productive asset adorned by conspiracy theorists and crackpots.
Loathe it or love it, but gold has enjoyed fairly high popularity in the past decade. Its price has reached new highs and managed to remain firm even when broad indexes have coasted. This points to the metal’s tag of being a safe haven. And it is precisely this feature that has prompted many investors to rethink their asset allocation and invest in gold.
But despite being the ultimate standard of unmatched wealth, safety and value for years, gold has now run into serious headwinds.
Lately, the sage of investing Warren Buffett made a convincing argument about gold, which, according to him, is an asset and not an investment. According to him, gold has two noteworthy shortcomings. First, as an investment it is not of much use and, second, it is not procreative. It might have industrial as well as decorative value, but both these purposes do not make it a good investment. For him, gold is as much an asset as real estate or crockery.
the difference between investments and assets
An asset is something that can be touched as and when desired. In case of gold, the owner can melt it and form a cube. Even after years of ownership, the cube will remain unchanged in size, and it will still be unable to produce anything. You can keep looking at the golden cube and admire it, but that’s pretty much where it ends.
Gold, silver, real estate and cars are all assets. If not looked after carefully, they will either depreciate or wear out with time. assets generally don’t appreciate in value, but people often get confused and buy them as investments thinking the value might go up. This is why the lay investor usually buys gold and silver.
Investments, on the other hand, are completely different. They have the potential to grow (or shrink) over a period and generate income in the form of interest or dividends. This clearly differentiates investments from assets such as gold or silver, which do not have the potential of generating income while in possession — unless someone pays a higher or lower price at the end of the ownership period.
Owners of gold, cars or other assets cannot make money from them unless these are sold to a third party at a higher price. In fact, they have to deal with depreciation and other expenses of owning an asset.
An asset merely retains its value over time, producing no income for the holder. However, sound investments made in shares, bonds and other similar instruments will not only appreciate in value if handled properly, but also provide regular income in the form of interests and dividends.
Therefore, instead of holding a risky asset, it makes a lot more sense to invest in a risky investment, even if it it related to the same asset.
Do ETFs score over physical gold?
The recent upsurge in the popularity of exchange-traded funds (ETFs ) has presented a new and better way to invest in gold. ETFs are basically a kind of mutual fund that is traded on the stock exchange, just as a regular stock. It is akin to purchasing physical gold and storing it for as much time as possible in a demat account.
The portfolio is fixed way in advance and doesn’t change with time. More important, one need not worry about the storage, purity and safety of the investment. ETFs can be purchased in small quantities and, being a liquid investment, they can be sold easily for a good value.
ETFs sell at the standard market rate and the proceeds are realised within two working days of the sale. This makes gold ETFs a transparent and much better investment compared to physical gold.
The gold buffs among you might be having a minor heart attack after reading the Oracle of Omaha’s views on the subject, but these facts are difficult to deny. This doesn’t imply that gold is a poor choice, especially for the short term. It’s just that you should know the real story before you bet heavily on this shiny metal.
The writer is CEO, BankBazaar.com