The legendary King Midas certainly favoured gold until he realised that his granted wish that everything he touched turned to gold did not allow for any exceptions. A bar of gold may be worth thousands of dollars but if you were carrying it while lost in the scorching heat of a desert you would gladly exchange it for a bottle of water costing less than a dollar.
But extreme situations apart, why would anyone invest in either gold or water? Neither pays any interest so they are as useful as leaving a million dollars in a bank deposit also paying zero interest. But they do have a value beyond considerations of interest. Once again investors are getting nervous about their stock market investments. Most markets had been rising exponentially till late September and were definitely looking overpriced. And it is now October, historically the month of the great ‘crashes’. So while some investors are cautiously locking away their gains in cash others are looking at alternative investments that might pay off while traditional stocks are falling. Hence they are looking at gold and even water. But why on earth water? I’ll come to that later but first of all let’s consider gold.
Gold – the ultimate store of wealth
Over a couple of decades I have been surprised to find how many expats in Bali have invested in gold, particularly in physical gold that they keep at home rather than entrust it to a bank’s vaults. Maybe it is because long term expats feel a little remote from the financial centres of the world and need something tangible to reassure them that they have something that can be quickly sold to cover travel or emergency needs. Many people have had bad experiences with the stock markets, which is strange because almost every year markets reach new highs so all you have to do is wait until such a high is reached, then cash in and you have made a profit! But human nature is such that people tend to buy high and sell low when they see losses appearing. This is when many turn to gold as it is perceived to be more stable. But it is not, and it can rise and fall just as stock markets, albeit less dramatically. A long time ago a client asked me to move his entire holdings in a portfolio into a gold fund. When I showed him a graph of the movement in the price of gold going back to 1980 he was able to see that it took almost a quarter of a century for gold to reach its previous peak after a gold bubble burst around that time. He agreed that 20 plus years would be a long time to wait for a profit.
But, like the stock markets, gold does keep up with inflation over time. While it is true that it pays no interest, it does hold its purchasing value over the long term in real terms, unlike cash. This could be very relevant and a strong argument for investing in gold while the purchasing value of currencies is under threat as a result of governments borrowing heavily during the pandemic.
Governments can print as much money as they want but they can’t print gold!
Gold’s real value is also assured as the amount of gold in the world is finite. The easy gold has already been mined; it is now much more expensive to produce what still remains in the ground. While a lot of gold is kept in vaults as a store of value it is also in constant demand in industry, especially at the high tech end. It is also highly prized in the form of jewelry, particularly in countries such as India.
So why would anyone invest in water?
Unlike gold there is an infinite supply of water in the world, although its distribution is extremely varied and sometimes cruelly excessive in some places and totally lacking in others. In terms of storage and value, a small bottle of drinking water would cost just a few thousand Rupiah, less than a dollar, and you can store it on the shelf or in your fridge. You would need to invest in millions of bottles to match the value of a small bar of gold. And you would need to pay much more for storage than the cost of renting a small box in a bank’s vault. So why on earth would anyone invest in water? And how can they invest?
There are very good reasons. Water, unlike gold, is critical to life. Millions of people across the globe depend on its effective management in order to survive and keep industries moving. Public utilities allocate a large part of national and local budgets to keep water and sewage systems working. Public services require support from private companies that provide processing services, water technology and environmental services. They also have a large part to play in combating the effects of climate change so have attracted huge amounts of money from investors wishing to support sustainable industries. There are a number of specialist funds that offer retail investors access to a cross-section of companies in the industry across the world and investments in these funds of late have produced far greater returns than those of funds invested in gold.
Does this mean water is a better investment than gold?
Not necessarily. The price of shares depends not only on the actual value in terms of earnings, but also in supply and demand. The huge amount of money invested in the past two years may have resulted in shares becoming overpriced. But for sure in the long term the water theme is one that is here to stay and, being a sustainable investment, could well outperform gold.
From 14th October 2011 until 14th October 2021 the price of gold has risen only 4.7% while one of the largest water funds has risen an incredible 370%! However, that is a slightly unfair comparison because if you take the gold price back to October 2008 it has now risen by 144%.
So a lot depends on timing when you compare performances. There is a strong case for holding a portion of both gold and water in a diverse portfolio. But do take advice before taking the plunge!
Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly in normal times! If you have any questions on this article or related topics or would like to receive a free monthly newsletter on financial matters you can contact him at firstname.lastname@example.org
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Copyright © 2021 Colin Bloodworth