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Why you should invest in gold

October 30, 2009 17:22 IST
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Gold has been considered as a symbol of wealth and prosperity in the Hindu religion. Whether it is Diwali or any marriage, Gold has been important part of any occasion. Apart from being an element of beauty, today gold is treasured more as a commodity and an investment.

According to the World Gold Council, the biggest source of growth in demand for gold has been investment. Investment demand rose by 248 percent on year-on-year basis during the first quarter of 2009.

But why should one consider investment in gold. Let us explore the reasons. The most compelling reason for putting money in gold is its role as a long-term or strategic asset. Even in situations where currency of a sovereign loses acceptance, gold still retains its value. Second, gold provides diversification to the portfolio given its lack of correlation with other assets.

What this means is that in case other asset classes (like stocks, bonds, realty) go up or down, gold is not affected to a large extent by such movements. Last but not the least; gold has been doing really good in recent years.

Growth in investment demand has been the primary driver of the rally that has taken gold from around $250 in early 2001 to peaks above or close to the $1,000 level in 2008 and 2009.

How to invest in gold is the next question that is popping up in mind. Gold can be purchased in real form, which has been the most common case in rural areas and majority of urban population.

But this form has its own weaknesses. First, storing gold requires cost of safe. Usually investors which prefer gold in this form do not take this cost in consideration.

Another way to store gold is at one's residence which is a very risky measure from security point of view. Another disadvantage of storing physical gold is that on purchase, buyer has to pay a handsome price for its making, if it is jewelry. Even if one chose to store gold in real form, it is better to go for gold coins or biscuits.

Finally, this form of gold cannot be said to be fungible i.e. it is not freely accepted by all. Usually, the vendor from whom one has bought gold does not provide full value to the gold of another vendor. This further reduces the value of investment.

With the advent of new financial products in the market, gold has also been made available as a paper or electronic investment. Some benefits include no making charges; no botheration about storing as one gets his investment in gold in demat form; no problem of finding a vendor who can provide the real worth of investment; wholesale rates and much more.

There are two major futures exchanges - Multi Commodity Exchange of India Ltd and the National Commodity and Derivatives Exchange Ltd. Another way to invest in gold as explained above is investment in Gold Exchange Traded Funds.

Gold ETFs invest in gold and the value of units (Net Asset Value) mirrors the price movement of gold. If on any given day, gold price goes up, NAV of Gold ETF moves up that particular day.

Each unit of fund is equivalent to one gram of gold. These instruments give investors a relatively cost efficient and secure way to access the gold market.

They are listed securities that are backed by allocated gold held in a vault on behalf of investors and are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange.

Gold ETFs were launched in India in early 2007. Six fund houses - Benchmark Asset Management Co., Kotak Mahindra Mutual Fund, UTI Asset Management Co., Reliance Capital Asset Management Ltd., Quantum Mutual Fund and SBI Mutual Fund - currently offer gold ETF products in India. Religare Mutual Fund has submitted a proposal to the Securities and Exchange Board of India to launch gold ETF.

An investor is always looking for an investment which provides returns matched with risk, diversification and liquidity. Gold, in its security form, provides us with these traits to a large extent. No doubt, gold is one asset class which every investor must consider.

However, the time to invest should be checked with the price history. As with shares or any other asset classes, investing at right time is said to be half work done. Investing in gold when prices are at historically high level might not be a good idea.

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