Gold as an Investment Option


By

G. Vasudha
Asst. Professor
TKR Institute of Management & Science
Hyderabad
 


There are many savings and investment options available in India. One of the options is gold. Gold has been valued since prehistoric times and is the investment option that has been seen as the ultimate form of safe haven investment and the only true form of wealth. Gold has been popular in India because it acted as a good hedge against inflation. There is so much uncertainty in the world in terms of economic growth and geopolitics, it is no surprise that many investors, big and small have chosen to hedge their investments through gold.

Gold is an important and popular investment for many reasons:

* Gold remains as an integral part of social and religious customs, besides being the basic form of saving.

* Gold has aesthetic appeal .Its beauty recommends it for ornament making above all other metals.

* Gold is indestructible which does not tarnish and is also not corroded by acid-except by a mixture of nitric and hydrochloric acids.

* Gold is a currency that has no borders and does not need to be honoured by any governmental obligations.

* Gold has long proven ability to retain value and appreciate in value.

* Gold is readily available in a standardized form.

Gold better than equities

According to the World Gold Council, investing in gold is considered to be safer than traditional investments in equities and bonds since gold is the commodity where the price is determined by various factors apart from its demand and supply. Also, it is a commodity that is priced in US Dollars as against our local currency. The factors that affect the price of gold are rather different from factors that affect other assets like say domestic fixed deposits. Inflation will have no impact on the price of gold, other factors remaining the same thereby lending support to your wealth. In fact, in times of inflation, more money tends to move to gold, thereby driving up its price.

The last few years show a steep rise in oil prices resulting in a rise in inflation not only in India but globally. The impact has been varied across countries depending on factors such as economic cycle and oil consumption. This general price rise has added to the attractiveness of gold.

In other words when the stock market crashes or when the dollar weakens, gold continues to be a safe haven investment because gold prices rise in such circumstances.

Gold investment options

Not many people know that there are various investment options in gold like gold bars, numismatic coins, and gold accumulation plans by banks and financial institutions, and gold mutual funds.

Across the world, several investment options are available for investors to put their money in the yellow metal.

* Gold savings accounts: They operate like regular bank accounts where the customers account is credited with balances of gold and withdrawals can be either in the form of gold coins or currency equivalents.

* Gold accumulation plan: A monthly debit from customer's savings account is backed by 100 percent Physical gold.

* Gold chits: Also there are gold chits run by jewelers where at the end of the year, housewives can buy gold jewellery or coins from the same jeweler worth the total money they have paid in instalments.

* Gold deposit scheme: It is one of the options to invest in gold where one can keep gold in banks for specified period like a fixed deposit and can claim as and when required .But it is not like pledging as the ornaments will not be returned in its original form because the banks melt them and rent to the industry.

* I-gold: An investor can purchase gold from a stock broker as just as he used to buy equity shares.

* Mutual funds and Buying gold as ornaments are other options.

Realizing the potential for Gold as a safe investment option World Gold Council has made several suggestions regarding this matter. These include allowing banks to offer gold backed investment products and gold loans to local jewellers.

Suggestions for investing in gold

* When investments in gold are made in the form of ornaments a large part of the appreciation in value is lost while selling it apart from the making charges, waste removal and sales tax. Buying in the form of gold bars or coins from approved valuers is considered to be best.

* Buying Gold in seasons other than wedding season and festive seasons like Diwali will offer  best returns.

* The investor has to lose the making charges when invested in the gold deposit scheme

Studies conducted by Security Exchange Board of India reveal that gold has been the second most preferred option among the Indian public after deposits in banks.An increased pace of liberalization measures in India will account for many new options to emerge to invest in gold bars, gold coins, gold funds and gold options.

The benefits of investing in gold are that besides earning a decent rate of return there are no headaches about keeping it safe. When investments are valued in a depreciating currency allocating a portion to gold is similar to a financial insurance policy.

References:

www.moneycontrol.com
www.the-week.com
www.sify.com
www.rediff.com
www.eaglewing.com
 


G. Vasudha
Asst. Professor
TKR Institute of Management & Science
Hyderabad
 

Source: E-mail July 21, 2006

     

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