Gold as an Investment Option

The love for gold in India is legendary. Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social, or currency-based crises. Apart from bank FDs. Even today very few populations in India understand equity market as a investment place. People still believe gold as a safe investment.

Historically, gold has proven to be a sound investment when it comes to fighting inflation–higher inflation leads to higher gold prices. Besides investment in gold has always played a significant role in religion, rituals and human sentiments, making it an indispensable investment option. This is truer for Asian investing than any other investing community around the world. Foreign investors, bankers and central banks of different countries use gold as a hedge against a declining dollar. During geopolitical and financial market instability, gold has proven to be a safe investment haven. Moreover, gold has generated phenomenal returns as an investment option in the past three years.

Here we will try to focus on some aspect of investment in gold. Its very difficult to time the market i.e. equity, real estate, or gold market. So we will not go to the discussion that is it the right time to invest in the market at the level of Rs 16000 per 10g or $955 per ounce. Its totally depend on individuals need of investments.

History of gold prices in Indian Rupee.

Currently, the fundamentals of gold as a commodity are good as there is a huge mismatch in demand and supply. From the supply side, gold mining has been stable for the last five years at 2,500 tonnes a year. New mines that are being developed are serving to replace current production, rather than cause any significant expansion in the global supply. The long lead times in gold production, with new mines often taking up to 10 years to come on stream, means mining output is relatively inelastic and unable to react quickly to a change in price outlook.

Here are some details of the returns comparison of gold and US dow jone index in US $.

Factors affecting demand in gold
(a) The volatility in the equity markets worldwide,
(b) US / Global recession,
(c) Inflationary pressures due to high oil, commodities & food prices
(d) Weakening dollar
(E) Dipping supply

Gold, with its traditionally negative co-relation with other asset classes such as stocks, fixed income securities and commodities, has made it a popular investment for portfolio diversification. An individual can invest in gold through various routes. The most conventional route is to possess it in physical form. However, this kind of investment is not only risky but also requires high carrying cost.

1- Physical form
The most conventional route is to possess it in physical form.You can buy it from any trader of gold in the physical form like biscuit, coin or bricks. This kind of investment is not only risky but also requires high carrying cost.

2- ETF (Exchange Traded Fund)
Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange. These are passively managed funds and are designed to provide returns in tandem with movements of physical gold in the spot market. In the last one year, almost all Gold ETFs have generated similar returns to gold bullion index.

3- Gold Bonds or certificates.
Issued by various central and commercial banks. These bonds generally carry interest rates and a lock-in period varying from three years to seven years. On maturity, depositors can take the delivery of gold or amount equivalent depending on their options.

On the basis of above data and information we can conclude that gold is a good investment option but investment at the current level is bit doubtful.