Is Gold an attractive Investment alternative?


By

Padma S Rao
Asst. Professor
Global Academy of Technology
Bangalore
 



"No other commodity enjoys as much universal acceptability and marketability as gold."
                                                                                                                                                - Hans F. Sennholz

Last week continued to be a sad week for investors. The road to multiplying money through investment in shares since Jan 2008 is full of bricks & stones. Many have burnt their fingers in share market. The uncertainty has made the investors to look for alternatives. This has paved a way for investment in gold especially this year. Investment in real estate is not at all easy. Investing in the yellow metal is an ideal money move this year, say experts. Gold often has a negative correlation with stocks. This is the reason why gold has become a popular vehicle for portfolio diversification. Gold is not only a safe vehicle at all times but it also yields handsome returns in the long term in the form of appreciation in its price.

One thing is sure - you do not have to be glued in front of the computer monitors to track the price movements of stocks through out the day, which is required while trading on-line. No doubt, gold prices have been volatile but definitely not to the extent seen in case of share prices. Gold price movement is likely to be within a reasonable range. For example on a day - to - day basis it could be in tens or hundreds of rupees per 10 grams of gold.

When to buy gold?

Actually I can say it could be 24x7 Invest any time you like! And at any time you have funds to invest! But one can avoid festival seasons as prices are likely to be higher at that time. If we look at the past, almost since 1998, the trend in the prices is upward. Indians are the biggest buyers of gold in the world.  
 
The lure for the gold has not reduced in spite of the rise in prices. Have a close glance at the gold prices given in the following table. From 1975 to 2008, gold prices have steadily increased except of course during the years 1997-1998, when there was a decline in prices.

Gold Prices in India

As on 31st Mar

Gold price per 10 gm

As on 31st mar

Gold price per 10 gm

1975

540

2000

4395

1980

1330

2001

4410

1985

2130

2002

5030

1990

3200

2003

5260

1995

4658

2004

6005

1996

5713

2005

6165

1997

4750

2006

8210

1998

4050

2007

9500

1999

4220

(27-6-2008)

12568


These figures are enough to instill confidence in investors to invest in gold.

Why invest in gold?

Investing in gold is almost like having money on hand. It is preferred for the following reasons.

1. Liquidity - Any time, gold can be converted in to cash and hence it is a highly liquid asset.

2. High Value - It is a precious metal of high value just next to diamond and platinum with 10 grams of gold costing around rupees 12,500.

3. Convertability Ornaments can be converted in to gold coins or bars and vice versa.

4. Easy to store gold in any physical form needs hardly any space for storage and gold worth millions of rupees can be safely stored in a small bank locker.

5Indestructibility gold does not rust or decay on storage.

6. Status Symbol - Gold has an intrinsic value. It is highly desired by everybody all over the world since ages. For ladies, especially in India, possessing gold ornaments is a status symbol.

7. Good security One can easily get loan from banks since banks easily accept gold as security and offer loans.

8. Benefit of diversification - Investor should always follow the principle of "Not putting all the eggs in to the same basket" in order to maximize the return and minimize the risk. Investment in gold helps one to achieve efficient portfolio.

9. Hedge against inflation - Gold acts as a hedge against inflation because of capital appreciation.

What form of gold to buy?

Gold comes in different forms. You can either buy it in physical form like gold bars, biscuits, coins, ornaments or even in a dematerialized form.

1. Ornaments. For many Indians purchasing gold means buying ornaments. Indian women have craze for gold. Nicholas Boileau has aptly quoted "Gold gives an appearance of beauty even to ugliness." But from the investment   point of view this is not profitable since you lose what you have paid as making charges (25% to 40% depending on the design). A word of advice to Indian males! Do not tell your wives when you want to invest in gold for getting better return.

2. Gold bars, Gold Coins & Biscuits - These are the ideal forms of physical gold to invest. They are priced at market value and can easily be exchanged for cash at market price with nominal service charge.

3. Investment in Gold bonds or certificates

The other option is to invest in gold bonds or certificates issued by commercial banks. These bonds generally carry low 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.

4. Gold ETFs

Gold exchange traded funds (ETFs) are nothing but open-ended mutual funds that invest the money collected form the investors in standard gold bullion (0.995 purity). The units of these funds can be traded on stock exchange. By investing in these funds, investor can own gold in dematerialized form. The major advantage is that carrying and storage cost and risk of theft can be totally eliminated.

Some of the popular mutual fund houses who have launched GETFs are Kotak Mutual Fund, Reliance Mutual Fund and Quantum Mutual fund.

How much to invest?

One can safely invest 5-10% of their total savings in gold.

Where to Buy?

If you are buying ornaments, buy from reputed jewelers. It is better to buy gold coins and gold bars from commercial banks. Some of the banks which sell 24 carrot gold coins & bars are HDFC Bank, State Bank of Mysore, Bank of Baroda, Canara Bank, Corporation bank, ICICI Bank, etc. Pure gold coins can also be purchased from private houses like Tanishq (Tata enterprise) & Reliance jewel.

What about Income Tax?

Since there is no regular income from investment in gold, there is no question of income tax.

Summary

One thing is sure. You will rarely loose money if you invest in gold. Gold continues to be one asset that appreciates steadily. A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. You can safely invest in gold. If you buy in physical form take care to keep them in bank lockers.

References

1. Investment Analysis and Portfolio management, Prasanna Chandra -TMH - 2nd Edition,2005
2. Investments Zvi Bodie, & Mohanty TMH 6th Edition, 2005
3. Investment Management VK Bhalla ( S.Chand & Co)
4. http://www.investmentrarities.com/FamousQuotes.html
5. http://sify.com/finance/fullstory.php?id=14700117&cid=20742
6. in.rediff.com/money/2008/apr/11trans.htm
7. http://sify.com/finance/forex/fullstory.php?id=11959556
8. http://www.moneycontrol.com
 


Padma S Rao
Asst. Professor
Global Academy of Technology
Bangalore
 

Source: E-mail June 28, 2008

           

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