Gold vs. Gold Stocks vs. Stocks vs. Dollar vs. Oil

Gold vs. Gold Stocks vs. Stocks vs. Dollar vs. Oil

Gold

Gold is the most important store of value today and the most important components of the global economy since 1945. Gold's value remains fairly constant or increases overtime, it is hence used as an ideal hedge against inflation. People invest in gold because despite high inflation, it's value does not depreciate

Gold is also a safe haven asset. Increasing gold prices are a traditional indicator of a recession or a downturn in an economy. People run to the safety of gold when they think the value of other investments may go down in the future. Indians traditionally hold gold for the same reason, holding savings in gold immunes people from depreciation in the value of money which they can later use to pay for healthcare etc.

US Dollar

The most important currency in the world today. Most of the trade in oil is invoiced in US Dollar. Whenever India buys oil from Iran, natural gas from Russia and electronics from China, we do not pay them in Rial, Rouble or Yuan, we pay them in Dollars. Similarly, when India sells leather to Australia, they pay us in Dollars. Dollar Rupee exchange rate is thus very important for both imports and export competitiveness. It goes high, consumers suffer, it goes low exporters suffer.

Oil Prices

India is a heavy importer of oil and oil is the most important energy resource. An increase in the global oil prices hurts the Rupee and the Indian economy.

Gold and oil are positively related. A rise in oil prices is an indication of bad times and gold prices rise correspondingly.

Gold and stocks are negatively correlated. If stocks go up, gold goes down and vice versa.

Stocks

Stocks are the most interesting of these four assets.  I call them the 'king of good times'.When the economy is doing good or is expected to do good, their value rises, when the economy is doing bad, their value takes a dive. India's individual stock ownership rate is quite low, this adds an extra layer of risk to the Indian stock markets that are affected by global shocks.

Buying Gold Stocks

Gold stocks are usually gold producers. That mean they mined gold and sell the minded good. You can buy gold stock through a stock broker. Or you can buy a group of stock by buying a gold mutual fund or (ETFs). Gold stocks usually move to gold prices, but they don't move the same amount and they don't move the save way.

Buying Gold

Gold on the other hand is the metal itself. It used to be that in order to buy gold you have to physically take possession of the metal. However, this is no longer the case. Currently, there are two or three ETF or exchange traded funds that "holds" gold. The first two funds are IAU and GLD, which actually own gold and you are buying a share of that ownership. There is also DGL which owns contracts on gold. You can purchase these shares through a broker and they will give you very direct exposure to gold movement--a more "pure" play on gold. Buying gold stocks is not as pure.

Investing in one is not necessarily better than another, they are the different. One represents shares in business relating to gold and the other is the gold itself.

Buying Gold vs. Buying Stocks

The performance of gold bullion is often compared to stocks. They are fundamentally different asset classes. Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e. growth due to anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil.

Add new comment