Well this post on gold may not be of interest to many but still…
Assume that you have 10 lakhs , and you have an option to start a business and another option is to buy gold.
At today’s gold price of 2500Rs approx 400 grams of gold can be bought. This 400 gms of gold will be the same 400 grams 10 , 20 , 30 years down the line and we buy gold on a assumption that some X , Y , Z guy will buy at a price more than what you have paid.
Take the scenario of starting a business with the same 10 lakhs say a restaurant business. Assume that 5 lakhs is used for purchasing land , 3 lakhs for interiors and 2 lakhs for raw material and other additional cost.
The hotel business make a decent profit of say 4 lakhs in the 1 st year, so in 3 years you will recover your investment. (Note : If the profit is less then the time taken to recover the capital will obviously be delayed)
With this 12 lakhs accumulated profit in 3 years, we can expand our business and this cycle will go on.
Now there are 2 assets in which we have invested gold and land. Gold as an asset haven’t produced any return however the land as an asset has produced a return of 12 lakhs in 3 years.
Remember we are not talking about the increase in price of gold or the land . The 12 lakhs profit earned is not because of the increase in land price but because the land as an asset has produced a return and over a period of time as the business expands land as an asset is going to produce more return.
Assume that price of gold and land (land on which your restaurant is constructed) raises by same percentage say 15 % every year. So in 5 years some X guy will buy the gold from you at 20 lakhs and the land on which the restaurant is constructed for 10 lakhs. Remember in real world this increase in price of gold is driven by various demand/ supply mismatch and predicting the price increase or decrease in gold/ land price is impossible(At least for me).
So in this 5 years gold would have generated a return of 20 lakhs and the restaurant would have generated ( 10 + (4*5 = 20) lakhs = 30 lakhs) in total.
So an investment of 5 lakhs in productive asset land is producing a return of 20 lakhs, where as with gold it’s 10 lakhs, and it’s on a assumption that some one is going to buy at a price higher than you.
Extrapolating this restaurant argument , assume that we get a X % stake in the company and this company is public ally listed then its a stock market investment. Now comparing the return from gold and business, some facts based on the public ally available data
Gold price for the past 40 years has grown at the rate of 12.44 % per annum, Sensex for the past 30 years has grown at a rate of 17 %. If you think the % difference is small check the below numbers.
1 rupee invested in gold for 40 years @ 12 % would have produced a return of 100 rupees.Same 1 rupee invested in Sensex 30 years back at 17 % would have returned 120 rupees and in 40 years this number would translate to 500 rs.
Productive asset better than non productive asset?? Comments most welcome.
mythoughtsoninvesting 