For centuries gold has been the ultimate cushion.
A way to safeguard your investments against the dangers of stocks price falls, fluctuating rate changes, inflation, rising/falling real estate prices, natural calamities, wars and more.
If ever there was a more testing time for gold to prove its mettle, it is now: during a global recession.
The million dollar question today is: will gold retain its sheen in the year 2009, the year of reckoning? Nearly everyone has been breaking their heads trying to figure out the safest investment avenue this year.
In India the stock markets are low, interest rates have come down and elections are round the corner. Is gold the obvious investment destination in such a scenario?
What moves gold prices
Let us first try and understand the factors affecting gold prices before we decide whether we should invest in it.
Tightening of gold supply
Gold mining is decreasing and the demand for gold is increasing. Gold supply has decreased by almost 40 per cent as the cost of mining, legal formalities and geographical problems have increased which has led to a fall in gold mining. Economics have taught us that lesser the supply, greater the demand and in turn greater the increase in price.
Inflation and interest rates
Gold has always been considered a good hedge against inflation. Rising inflation rates typically appreciates gold prices. It has an inverse relationship with interest rates. As gold is pegged to the US dollar, US interest rates affect gold prices. Whenever interest rates fall, gold prices increase. Lowering interest rates increases gold prices as gold becomes a better investment option vis-à-vis debt products that earn lower interest. Gold loses its shine in a rising interest rate scenario.
Currency fluctuation
As gold is pegged to the US dollar, it has an inverse relationship with the dollar. Right now with US being in great financial turmoil, the dollar has weakened against many other currencies. Dollar is expected to weaken further and prices of gold are expected to rise further. Dollar is a de-facto currency of exchange around the world. But now with US on the brink of depression, gold is substituted as a safe haven for investments. Though dollar seems to be getting stronger, it may be a temporary effect and very soon it can head southwards once again, in turn making gold an attractive and safe investment.
Geo-political concerns
Whenever there is geo-political strife, investors around the world rush to prevent erosion of their investments and gold as a safe haven attracts one and all. For example after 9/11 terror strike in the United States the demand for gold had increased. With the recent events like tension between India-Pakistan, Israeli strikes over Gaza, the ongoing war in Iraq, the tension between US and Iran coupled with recession have investors scrambling for gold.
Central bank demand
With the dollar losing its value, central banks of most of the developed countries have started to increase their share of gold. This explains the increasing market demand for gold.
Weakness in financial markets
General rule of thumb in the market is that gold is always attractive when all other investments are unattractive. Why is this? As gold is negatively co-related to stocks, bonds, and real estate, gold is considered to be a safe haven and hence during any crises, investors would like to sell off what they would term as risky investments and be invest the funds in gold.
Why you should invest in gold
You might be wondering why gold is termed as safe haven. Gold is the most liquid asset in the world. If you wish to sell a gold bar or gold coin of 99.9 purity or 99.5 purity anywhere in the world, you will get its due worth without the risk attached to other investments like exchange rate risk.
While investing in gold the first question you must ask yourself is whether you should buy at these levels or wait for a while for the prices to come down even further?
As for the future of gold in 2009 and further to come 2009 may see gold touching $1,000 or more an ounce and then again settling in the range of $800 to $900 as banks from around the world would sell their gold stocks once it ouches $1,000. But gold will stay bullish till the time the current financial crisis prevails.
Financial crisis or no financial crisis, investing 5 percent of your portfolio in gold is always advisable. Gold is a good form of investment for diversification. Remember one thing, just like any other investments; space out your investments in gold. Do not buy at one go; be it gold bars, gold coins, or units on gold exchange traded funds (ETFs). Invest regularly and diligently.
Jewellery or gold bars?
Here are a few options that an investor in gold can consider.
Jewellery
As an investment avenue, gold jewellery is a BIG NO. Investing in jewellery is not investment as jewellery is generally not made from 24 carat gold; it is generally made from 22 carat or 18 carat gold since 24-carat gold is brittle and cannot be set to beautiful designs of jewellery as being brittle it can break easily.
The main drawback here is that you have to pay for the making charges. If and when you want to liquidate the money invested in jewellery, your making charges are cut and you end up getting less than what you had invested.
Gold bars or coins
YES.
Investment in gold should be either in gold coins or bars. Remember to buy government-certified gold coins or bars and preferably the purity level should be 99.9 as they are easy to sell. Also, be sure of the place from where you are buying the coins. But preferably from banks.
Gold exchange traded funds
This is the latest buzz. It is like buying gold but in indirect form. You invest money in a gold fund, which in turn invests your money in the physical form of gold. These funds are open during the new fund offer and for buying or selling them they are listed on the stock exchanges.
When you want to redeem the units, you can go to the fund house and get them converted to either physical gold bars or cash. This form of investment is good for people who have storage problem like no bank lockers and also for spacing out your investment in gold. This way you can take advantage of gold price volatility.
Also, wealth tax does not come into picture if you invest through ETFs.
There are other forms of investments in gold like derivatives, spread betting, certificates and others. But for retail investors gold ETFs or physical gold bars and coins are the best forms of investment.
The only drawback of investing in gold is that it is a sterile investment: it neither pays any dividend nor interest.
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