Disadvantages of Buying gold

Gold is hitting new highs almost every day and it seems that all people are looking at opportunity to buy it whenever they get it. There is almost consensus that it cannot fall and if does it will be short-lived and it will rise again. However before buying gold one should look at the disadvantages of buying gold –

  1. Gold does not provide any regular source of income if one compares it with fixed deposit which gives interest or equity shares which give dividends so if you are going to buy you have to depend on only one thing which is rise in price of this commodity which we all know has been rising from past 5 years and to expect it to provide similar return in next 5 years is irrational because any asset class does not perform in the same way forever.
  2. One should remember that gold is not the same thing which it was 10 year back, previously gold used to be in physical form only and people who bought used to buy it for long period of time and they were genuine investors. At present gold is traded in commodity market and also in ETF form and there is plenty of traders and speculators money which has gone into this spur in gold price and when they will take money off the table don’t be surprised to see gold down 15 to 30 per cent in short period of time( sounds unbelievable). At that time one can consider it buying if one wants to buy it but not now.
  3. Gold is considered to be alternate to currency but apart from it there are few uses of gold and that is what the main problem with this investment because before making any investment one should consider demand and supply dynamics and at this point of time and price those are not in favour of making investment in gold.
  4. At the end of day gold is just another commodity and we all know how commodity market operates, in commodity markets there are few big players who control the market and when the commodity bubble bursts the price of commodity crashes and falls 70 to 80 per cent of its peak price. I am not saying the same thing would happen with gold but it can certainly fall 20 to 30 per cent.

Many people would not like these arguments and gold may rise further but the fact is it is increasingly getting overvalued and in bull markets of any asset class people just go with the crowd and do big mistakes of buying when price of asset is high and then they have no option but to repent. I hope after reading this article some people may postpone their investment decision and buy it when price come down rather than chasing it when prices are hitting the roof.

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