This article appeared originally in Gulf News: link to original article
What is happening to gold price? Okay let me put it in a different way; what happened to gold as an investment? Why did its price drop from levels beyond $2.000 per ounce to $1,400 levels per ounce? Was gold an appropriate investment, ever? As you receive now your checks of dividends paid to you as a return on your investments in different companies, I would like to do a brief comparison between gold, stocks, and a few other investments wherever deemed necessary for the purpose of this article.
What’s common between gold and stocks as an investment? And what’s different? Keep in mind please that gold does not pay you dividends or any other annual type of return because “gold did really well this year”. Another difference is that gold does not have an Initial Public Offering, IPO, besides that it is not as liquid in terms of its market trading. Moreover, we are also aware of the limitation of gold availability; unlike stocks which can be issued based on market conditions and the credibility of a company to qualify and be able acquire funds from financial markets.
So again, what’s common between them? People who invested in Apple, IBM, and Dell internationally, Emaar, Adib, NBAD locally; have realised certain gains in stock prices hence investment. And yes, you can definitely argue that the gains might be pure inflation in bull markets, but they are still gains. The companies mentioned are only a few examples of companies that can be publicly identified where stocks have realised capital gains. And this is what happens with gold. However, gold does not get into accounting scandals for its price to suddenly drop as much as it does not come up with a new iPhone that makes its price skyrockets. It is more of an escape for investors who are threatened by the economic situation of countries and the financial situation of companies, and are led by a misconception of gold being a good investment. If too many people buy a product, price should go up. If too many people sell a product, price should go down. So with gold, you should have sold your holdings in gold when the price exceeded $2000 per ounce.
When the financial crisis became a reality, that is; countries and investors believed in its existence and the effects that it had, cash was pulled out of investments despite their nature and put into gold, or their certificates, or bonds associated with it, or marginal contracts, or whatever way that investments were channeled into gold.
And of course, gold price went up and kept going up. Since investors are now — relatively speaking — less concerned with the crisis as economies are catching up; isn’t it normal for the price of gold to be going downhill?
Yet, investors cannot make this too dramatic; countries can. Countries in distress, because of their situation as a result of the crisis or as a result of economic sanctions imposed on them would sell their reserves held in US Dollars as well as gold. As long as China is doing fine, Uncle Sam should have a good night sleep. But with gold, the case is way too dispersed among countries and investors for a single country to stabilise its price. If investors and countries did not cause enough damage to gold price already, public panic will.
Let’s assume there are no products associated with gold, do banks offer decent rates for you to keep your money deposited in their accounts? Let’s rephrase this, do banks offer interest rates with inflation–added premiums? No, while gold would at least appreciate in price whenever people rush towards buying it, beyond inflation itself. So it’s left to how optimal your timing is in
when to buy gold and when to sell it; and you missed a very important crisis anyways.
Stocks, on the contrary; would offer you dividends if companies are doing fine. And if companies survive business cycles, they would offer dividends as soon as their financial performance picks up.