GOLD!! A better avenue for an investor!!
Continuous bull run in the Indian market for last four years is looking to slowdown. Industrial production as well as the stock market mayhem in the last four months is reflecting that the global scenario continues to be gloomy. Inflation has overtaken the bull run. In such a situation, investors find themselves in a condition where they are unable to decide where to invest.
The general rise in prices, or inflation, can be easily understood as an environment where there is too much money chasing too few goods. The resultant rise in prices has a corresponding impact – a decline in the value of the currency as you start to pay more for the same product/service. So, if you were paying Rs. 45 per liter of diesel, you start to pay Rs. 55 for the same quantity. This attrition in the value of the currency is something investors should guard themselves against. And the best way of ‘guarding’ is to hedge.
So now a question arises how do you go about hedging to protect the ‘real value’ of your wealth? One can hedge by investing in assets/securities, which are either not adversely impacted by a rise in inflation or benefit from it. Prime amongst such assets/securities is gold. Gold is in this regard a good candidate, as its value does not rely on any particular government’s health. In simple economic terms, gold moves up in tandem with inflation or one can say that investing in gold is considered safe when there is a crisis of confidence in the equity markets. As such gold is a natural hedge against rising inflation.
Factors such as the volatility in the equity markets worldwide, concerns of the US recession, inflationary pressures due to high oil, commodities & food prices and weakening dollar, have generated a lot of interest for gold amongst the investors across the world. Gold is a commodity the price of which is determined by various factors apart from its demand and supply. As compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.
The weakening Dollar is driving global investors to move to other investment avenues such as gold, bonds and equities of other markets including emerging markets. If we talk about gold, it is globally priced in US dollars; therefore if the value of the US Dollar were to decline, then Dollars for the same amount of gold have to be paid more and vice-a-versa. The rise and fall in the price of gold therefore may have more to do with the value of the dollar as against a fundamental change in the value of gold. Over the last couple of years, on a point-to-point basis, the US Dollar has lost value against all major currencies of the world (It has touched the multi year low against major currencies) and it has helped gold prices to climb the Everest. It touched the lifetime high of $1033/oz. In the mean time, globally inflation and high price have been affecting every sector. Thanks to all these reasons (mentioned above), gold has become a safe investment bet these days.
Back at home, gold is valued as a savings and investment vehicle and is the second preferred investment after bank deposits. One should buy gold when its price is low rather than high. Many people are lured to buy gold when they hear that the price has risen. Even though this can be the right action if the price continues to rise, it is often better to buy after the price has fallen.
Today, investor can purchase, trade or make investment in gold a variety of ways. Gold comes generally in two forms, also called bullion, these forms are coins or bars made of gold. With trading, most investors trade in gold futures on the market. Gold investments are often made in refining or mining companies.
Now the question arises how to buy gold? There are number of opportunities through which one can go for gold investment. Firstly, one can buy gold through the Gold Deposit Scheme. Furthermore, these bonds are free from wealth tax and capital gains tax. The principal can be collected back in gold or cash at the investor’s option.
Secondly, One can also buy gold coins or bars/biscuits from various authorised banks and dealers.
Thirdly, Gold exchange-traded funds are the modern international methods of investing in gold via gold mutual funds. For the first time in India, UTI, Benchmark, Kotak and Reliance mutual fund had launched gold ETFs in the year 2007 and at present UTI and Benchmark are enjoying a return of 20-25% since inception. Quantum mutual fund is the latest fund house, which joins the rally of gold ETF; it had launched a gold ETF in February 2008. In Quantum Gold ETF unit track the value of 0.5 gm of gold but in other Gold ETFs in India, one unit of gold ETF tracks the value of 1 gm. Gold ETF allows investors to buy gold in small increments. The value of the unit will move in accordance with the price of gold. Similar to mutual funds, the value per unit will be the total value of the gold held, divided by the number of units, minus the expenses of the fund. Gold ETFs, like any share, can be traded and bought by the investors through their stockbrokers. They can be used for speculating in the short-term for betting on the price of gold, or it can be used for long-term investing for creating a wealth as gold is considered as the safest investment avenue which hedge against inflation and depreciating dollar.
Last but not the least opportunities to buy gold is to trade in gold futures. In order to trade in gold future, one has to go to a brokerage house and open a trading account.
Conclusion: The love for gold in India is legendary. It is evident by the fact that India consumes around 30-35% of the total world demand of gold. Demand for gold for the purpose of investment has outpaced the demand for the yellow metal for jewelry because of its unique properties; gold has traditionally been the currency of choice for much of the world’s population. The value of gold has transcended all national, political, and cultural borders, making it the ideal currency.
It is the life belt for all seasons, especially the dangerous ones. Many investors do not want to take delivery of physical gold, but can participate in the price movement of gold through a range of financial instruments. The investor can own shares in gold mining companies, mutual investment funds, index funds, Electronically Traded Funds (ETF), and gold futures contracts.
While all the opportunities seems pretty rosy, there are some things to be kept in mind while trading in future. In future market, one can buy or sell gold worth of Rs 10,000,00 by only paying margin money of Rs 50000, if initial margin is 5%.
GOLD IS A SAFER BET FOR INVESTMENT IN LONG TERM
This is great info to know.