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How Low Can Gold Go?

gold_barHere is an interesting quote that I happened on today. It comes from a 70 year-old Chinese investor from Anhui province who was talking about investing in gold.

The investor said: “Whenever we have a bit of idle cash, we think of buying a few pieces.” He went on to say: “We don’t know how to invest otherwise and that’s the traditional way of preserving wealth.

There is so much that is not right about those two comments. When we invest we should consider the various options that are open to us. We shouldn’t invest in a product simply because it is the only available option.

We should also consider the intrinsic value of the product that we are investing in too. This is where I often part company with gold fans. I find it very difficult to value gold, which, for me, makes it meaningless as an investment.

Investing in a lump of shiny metal, which does not generate an income, is tantamount to investing in hope. Gold investors hope that the price that they pay for the yellow metal will rise. They may be right. But then again they are just as likely to be wrong.

Recent data has shown that gold has lost almost a third of its value since its peak of US$1,921 in September 2011. The only chance that investors have of making money is if the price of gold should rise again. Exactly when that might happen is pure speculation.

Compare that with the Straits Times Index (SGX: ^STI), which has delivered total annualised returns of 5.9%, 7.2%, 5.7% and 14.1% over the last one, three, five and ten years respectively. Consequently, an index tracker such as iShares MSCI Singapore ETF (SGX: EWS) should deliver returns that closely match the returns of the benchmark index.

Sharp-eyed investors will notice that the Straits Times Index rose from 1,558 points on 31 July 2003 to 3,222 points on 31 July 2013. That was a gain of 106%. However, the total return, which includes dividends over the same period, was 273%. The additional return of 167% (or two-thirds of the total return) was generated through dividend payments

For me, those very simple numbers underline why I like shares. If gold can do the same, then I would almost certainly be a fan. It can’t, which is why I am not.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.