Gold

These days everyone says buy gold or better buy gold based mutual funds. But is it actually what they claim it to be?

First of all why gold and not any other metal. This is only because gold is the most sought after metal and was used as monetary exchange. Though we only look at gold being used as Jewellery, it is also used in Industry like Electronics. In the international market gold is priced in Troy ounce, which is equivalent to 480 grams.

Gold prices have kept fluctuating from time to time from a low of $252 in 1999 to a high of $850 in 1980. The 1980 high was never overtaken till 2008. From 1999 to 2008 the price has gone up almost 4 times i.e. 400%. The major reason for the rise in gold prices is said to be because of increase in money supply in the market, inflation and high fiscal deficit of US.

But like all investments the price of gold also depends on demand and supply. But unlike other investments the biggest problem with gold is hoarding. Since there is always a steady demand for gold, but because of hoarding the supply gets limited and this raises the price.

Major part of gold mined goes into production and only around 15 to 20 % goes in Jewelley and Exchange traded funds.

As per the world gold council, the annual production of gold is around 2500 tonnes whereas the demand is around 3500 tonnes making the demand over supply to be around 1000 tonnes.

When it comes to investing in gold, it is always compared to stocks. The major difference between buying gold directly and stocks is holding cost of gold. You have to store gold and sell to get returns, but in case of stocks other than selling, you also get dividends. Gold will always have a demand, but the demand of a stock keeps fluctuating depending on a number of circumstances.

So the risk factor is low in case of gold. The only other risk in case of gold is holding risk. In that case ETF become a better option.