Saturday, March 16, 2013

Invest in Gold, or Invest in Cash Asset?

The amount of money supply in the market today is no longer following the available gold value in the market, which was used to be a rule of printing money in past time. Therefore, Gold and Money are two totally different things today. Both Gold and Cash have their own defined value separately. Some claim that investing in gold can protect our asset value, and prevent our asset being depreciated by the inflation rate, but it does not give us dividend. However, some claim that investing in some cash-value asset such as government bond and stock market will bring us dividend, a positive cash flow. So, what is the benefit of investing one over the other? Following is just my personal opinion, and what I understand about…

Investing in Gold, what’s the benefit?

First, let’s understand how does it protect our asset. Let say, today we have RM1000 in cash, and a gold of value RM1000 (less than 10 gramme I guess). Let’s say, today, the price of a bowl of mee goreng is RM5, that means we can buy 200 bowls with RM1000. However, 10 years later, one bowl of mee goreng may price RM10. With the cash of RM1000, we can only buy 100 bowls. But, the different is here. Because the gold is a commodity, which can be valued at RM2000. We can understand this in two ways:

1) Cash depreciated in value due to inflation, we need more cash to buy the same amount of gold.

2) Gold appreciated in value, we need more cash to buy the same amount of gold.

Whichever the way we understand, we get the same conclusion, we never can use the same amount of cash to buy same amount of gold after 10 years. Therefore, we still can buy 200 bowls of mee goreng with gold after 10 years. (I mean, the value can have it, of course we can’t use gold to pay.) We can just interpret how the gold protect our asset value in this way, easily.

We should think in this way, by conservative calculation, we don’t say the gold appreciated in value, but we say the cash depreciated in value with the rate of inflation. Therefore, this is just exactly meaning that we need more cash to buy gold. So? Gold increases in value literally.

However, we need to know, buying gold does not bring us any positive cash flow (if we are saying the dividend), because dividend is a return given by profitable companies or other investment subjects such as bonds, which share the profits with the shareholders/investors.

Investing in stock market/government bond, what’s it good at?

Investing in cash-asset is different story. Investment in something like stock market, government bond, or fixed deposit will always bring us positive cash flow. We invest in stock market, certain companies that is profitable, they will pay us dividend, which is so-called attributable profit to shareholder for them. If we invest/buy the government bond, we get annual return like 5.5%? If we save our money as fixed deposit in the bank, we get bank interests like 4%?

Dividend, bond return, and bank interests are positive cash flow to us. The bigger amount that we invested, the bigger amount of return we get as positive cash flow. Let say we invest RM10,000 in bank as fixed deposit, we have positive cash flow of RM400 every year (4% interests).

But, if we are buying gold at RM10,000, we are not very sure how much the gold will appreciate, or how much our cash will depreciate every year, in other means.

Which to invest? Any decision?

Investing in gold, help us to protect our asset value, but we can’t get positive cash flow. Investing in cash-asset, we get positive cash flow, but we can’t protect our asset value. It’s a matter of choice. But, how do we choose?

If, inflation rate is 5% annually, that means our cash is depreciated at a rate of 5% every year. If, we can’t find any cash asset that is earning more than 5%, then why don’t we invest in gold? Even though it can’t bring us positive cash flow, at least our asset value is secured!

If, inflation rate is 2%, and we can invest in some stock at 8% return. Let’s be conservative, we don’t know how much the gold will appreciate in value, but it just appreciate with the inflation rate of 2%, so we can just invest in the stock of 8% return, and let the cash to be depreciated at 2% with inflation rate. So, 8%-2%, we still have 6% return, which is a positive cash flow! We can invest in cash asset value, why not?

One sentence say it all

Investing in gold can guaranteed our asset being protected, and investing in cash-asset might give us positive cash flow if the return exceeded the inflation rate.


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  2. So you're interested in investing? Haha

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