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Posts Tagged ‘Money’

GOLD Member!

GoldmemberOne of my favorite villain in the movie Austin Powers is Goldmember. The funny thing is that this character shows what most people are doing right now!  An overwhelming obsession with gold when the value of the US dollar is in the decline. Didn’t anyone learn from the movie that it was his obsession with gold that made him an evil villain in the first place?

So now to the key question: Should you invest in Gold right now?  The experts, financial analysts, bankers, and even the newspapers are saying that it’s the hottest thing since hot dogs!  Everyone (from your pet gold fish to your granny) should jump in and buy some! Before you do so, pause and think for a moment.

Here is a useful chart to begin our discussion:

30 year historic gold price

  1. In Jan 1974, gold price was approximately USD 100.
  2. Assuming inflation of 6% per year, 36 years later in 2010, gold price should be about 8 times the price in 1974. That works out to be about USD 800.
  3. The year is now 2008. So that means that by simple estimation, the price of gold should be close to USD 800 without any significant change in demand.
  4. Gold price in the market is currently at approximately USD 930.

So it is a risk to get into gold at the current price. So why are people paying higher prices now?  Is there a supply shortage?  Is it possible that Goldmember (the villain) is taking over all of the world’s gold for his evil love for gold showers, and thereby crippling Indian weddings (who needs gold dowry) and Chinese gold teeth markets?  Or perhaps folks are just driven by pure speculation and fear of the falling value of the US dollar.  Whatever the reason, the reality is that there will always be a limited supply of gold.  When there is more demand than supply, prices will rise.  So why is everyone placing more value in gold than money?

Perhaps we should now realise that money is just pieces of paper with some long dead guy’s face printed on it.  So whenever any government wants more money, it has the authority and ability to bring out its mega photocopier and print lots more!  Now where is the value backing paper money?  Some currencies have a micro-small footnote that says “blah blah blah government promises to pay bearer”.  While other currencies even go to the extent of omitting this statement altogether.  So the value of money is actually the value of the government’s promise to pay.  But to pay what is the question even I have no answers to.

Having said that, so gold should be best investments, right?  The problem is that there are no business fundamentals to back up the price of gold except global supply and demand.  So unless you are an expert world economist with the IQ of Einstein and incredible insights, I have no clue what is the true supply and demand!

So if you still insist on betting your wealth on gold at this price, limit your exposure to only 10% of your investment portfolio.  However, if you have several gold teeth, rush to your nearest pawn shop to ask for valuation of your gold fortunes!

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This is not about an epic saga about to unfold, but rather a piece of basic investment advise for a friend.

There are three ground rules to investments and mangaging your money.  These are for your own protection as well as your sanity.

  1. Invest only your excess cash or other people’s money.  So that means if you have more than 6 months of salary sitting idle in your bank, invest the excess!  Similarly, if you managed to insure a million dollars on your pet, and it recently got rolled over by a truck (which incidentally made you filthy rich), invest it!  Anything beyond your 6 months of your needs should not be left idling in your bank drawing zero point something of a percentage in the bank.  Also, excess cash means money more than you need for necessities
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  3. If you are turly serious about investment, learn to think long term.  That means think in terms of years instead of days.  Stop looking at the stock market ticker!  Any serious investor should realise that good companies should not fluctuate in values of millions in the course of a single day.  For example, these value fluctuations in the stock markets are implying that the world woke up one day and significant percentage of the customers decided not to drink Coke for some apparent reason…yikes!  The good news is that everything stablises across a period of time.
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  5. Never tell your parents what you are doing with the money.  They can ask, but you need not answer.  Most well intentioned comments from parents are usually negative.  Dun ask me why.  If they had understood how to invest and taught you how to, you would not be reading this article.  You would have inherited a fortune and enjoying coconut juice on some tropical island that you own.
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So the list is not exhaustive, but it is a start for most folks.

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