Investment in Gold

We spoke in the earlier articles about investment in Equity and Debt. Let us now look at investment in gold. Gold was never considered as an investment option. Even if it was, the maximum amount recommended has always been 5%. But this has changed in recent years, especially with the price of gold just going up. As we all know that we make a profit if the price goes up, so any investment which increases the net worth of a person is worth investing. This is the reason for gold becoming the favorite of many.
 
Like all the people, even we want to invest in gold, so what do we do? Do I go to the jeweler and purchase gold or go to the bank and purchase gold? There are many options. Seeing the appetite for gold, many mutual funds started exchange traded funds (ETF). This gave the purchaser more flexibility, they could invest lesser amounts as well and the chances of cheating by jewelers (which was always the fear) became a thing of the past. It also increased liquidity.

 As mentioned earlier, gold is not a recommended investment. It is good only when faith is lost in the currency system of the country. It should be used only as a diversification for your portfolio, as gold has never beaten inflation. It is not a hedge against inflation, just like debt. Yes, in recent times it has appreciated quite a bit, but so has inflation. Earlier financial planners used to suggest 5% but seeing the rise in prices, they too have increased their recommendation by another 5%, some enterprising planners might go to 15% but not more.

So now if you have decided to invest in gold, it is better to go for ETF, as it is more convenient, with less risk of burglary. The risk of storage and safety is also taken care of by the mutual fund. There is no fear of the jeweler cheating you and you can sell whenever you require money. Now all you need to purchase ETF is a demat account. Happy Investing.

Should one invest in gold?

We always keep reading that gold is the best hedge against inflation. Gold prices have been going up for quite some time now. The way it is going up, it could be treated as an investment instead of treating it as a hedging tool. Many people have already started investing in gold, but then safety of storing gold is an issue.

A better way would be to purchase as a mutual fund unit in a gold exchange traded fund. That way, you would also have liquidity, since the price of the unit would rise as the price of gold prices and could be sold anytime through the stock exchange. But why should we treat it as an investment option?

Some of the reasons are the appreciation in the value of the US dollar and rise in the interest rates. The economy of most of the so called advanced economies is in a bad state and it does not look like there will be recovery soon. Most of the countries hold back their currency with gold reserves, so most of them would either increase their gold reserves.

Worldwide people have started investing in gold exchange traded funds. These funds back their units by buying gold. This has also increased the demand for gold. For the purpose of improving the economy most of the governments have increased their spending to increase the money supply in the economy.

More the money, more the chances of that money finding its way into gold and more the demand for gold, the prices will go up. Taking the past trend we might say that gold does not give good returns. But is that true? Have we not seen prices of gold just sky rocketing.

Gold prices go up, but they do not give returns as good as those of other investments. This is the reason it is a good investment option for those who do not like to take risks. With news that many countries on the verge of sovereign defaults and rising interest rates, there would be more demand for gold. So buy gold now.

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.