GOLD AS A NEW INVESTMENT CLASS

[Dr. Sanjiv Agarwal]

Have you ever thought what makes rich richer in this world ! It is investment in bullion, if the trend in investment in metals is any indication. The dazzling returns over last one year has enhanced investors appetite for gold and silver. While  prices of silver have been volatile, gold has seen a steady and consistent growth trend. 

It is well known that Indians have an affinity for gold ornaments but new trends indicate that it is not just jewellery, but  gold is being considered as a safe and serious investment option. Let’s look at the trend in figures. In the year 2010-11 closed recently, gold price appreciated by whopping 27 percent form Rs. 1630 per 10 grams to Rs. 2075 per 10 grams (62 percent in last three years)  where as there was a jump of almost one time (98 percent) in domestic demand  of gold. The investment in gold fund (exchange traded funds) rose by 180 percent from Rs. 804 crore to Rs. 2250 in just one year. Globally, gold prices saw a surge of about 30 percent whereas stock indices gave a return of around ten percent only.

This indicates that gold is now being seen as a new asset class for diversification by investors. India has ten gold funds, both in public sector as well as private players. While the investment in gold funds is generally made by high networth investors and retail investors, people do buy gold coins and gold bars from banks who vend such products. Banks would have sold about 200 tonnes of gold in last year (Rs. 148 tonnes in 2009-10). 

Most of the gold investments provide purity  except in case of ornamental use where pure gold is neither used nor claimed. Infact there could be situations where vendors claim a particular purity but actually it could be different. That’s why it is always advisable to purchase gold ornaments and jewellery from trusted jewellers, and that too hallmarked jewellery. One should insist on hallmark certificate to check the purity you are paying for. Investors buying jewellery may do well to demand bill with details of date, quantity, carat and buy-back policy mentioned thereon. While hallmarking is not mandatory in our country as yet , BIS is the standard hallmark used inIndia. 

Given the high and rising demand for gold, the metal is going to become scarce commodity, day by day. Investment demand is also on the rise as a new alternative investment avenue. Economic events in US such as financial mis-management in federal government coupled with deficit economy, US dollar being fundamentally and technically weak, negative interest rates or low rates in US, increased money supply etc shall also push up tangible investments in gold. 

With supply side fixed or rather expected to decline and growing gap between supply and demand, huge short positions, rising geo-political stress, gold’s acceptance as money value (currency backed by gold) – all  suggest bright future for gold with the prices of gold glittering and that of silver (poor man’s gold) sparkling . The rich (those who could afford investment therein) are getting richer, irrespective of whether the economy is good or bad or how the stock markets are performing. The wealthiest people have metal in their portfolio. The Times New World recently reported that multi- billionaires are buying gold by ton and running from investments in paper currency. 

Depending upon the funds available for investment, one must have gold in whatever form into his or her portfolio. Hunger for gold has been insatiable since long. And it is rightly said – hunger for gold is made greater as more gold is acquired.

(Watch out for investment in silver next week).   

Discussions to this article

[DEV KUMAR KOTHARI]

With reference to my comments in relation to article on Silver providign a silver lining I again feel at there should be  mixed mutual funds for precious metals to balance risks.  At least there can be a mutual fund for say 60% gold and 40% silver. (revised suggested mix) in view of volatilty seen in case of Silver. 

Long-term investment in gold and silver is good as a part of total portfolio.  Gold, silver, precious stones, and landed properties are necessary part of a blanced portfolio for any individual or family.

I againt say that in the days of high trading and high speculation in every thing (including real estate) investors have to be very careful to make investmetn at a time when the speculative gains are less and the market is in bearish mood. When price of onions can fall to about 10% of the peak price, within a short period, when price of CRUDE oil can fluctuat inrange  of + / - 60% within short duration of about 12-18 months,  onw need to be very careful. 

Experience shows that investors gain handsomely when they make investment  in a bearing market for long -term investment purposes. A purchase action  in bullish market is mostly costly and it may give gain in short term (if it is booked) but in long term any thing purchased in hot up bullish market is  is likely to result into losses. So beware of speculators and market stories causing more frenzied buyings.