"Borrowers will default. Markets will collapse. Gold will skyrocket." - Michael Belkin
Michael Belkin did see it coming; Gold has been in the limelight ever since 2008 when the meltdown made many investors poorer. Gold has always been the safe haven during apocalyptic times. In recent times, it has had brief bouts of correction on the backdrop of the strengthening of the USD, but this is only likely to be a temporary phenomenon. With the global scenario looking bleak it wouldn't be long before things start looking bright for the yellow metal again.
Interestingly, investments into gold have gone up only after gold itself has seen a sharp spike! Here are a few pointers to help you invest in gold in a better manner.
Gold —The Preserver
Gold is a preserver of value and hence is a good hedge during 'Inflation'. The recent turmoil in the economy saw Gold hitting significant highs. 'Gold' is a unique commodity, given that it is negatively / non-correlated with some of the factors that affect markets.
Gold is also a depleting commodity, and that alone will push gold prices higher in the long term. While demand for gold is widely spread around the world, 55% of the world's demand for gold is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors.
Like any other commodity around the world, Gold too is susceptible to the Demand-Supply theory. According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes whereas there has been an annual demand for gold of 1000 tonnes in excess over mine production (3,500 tonnes). This is a result of central bank sales and other disposal and thus led to a gross demand — supply mismatch. With the weakening USD, Banks are likely to move over to Gold as the most preferred asset for Reserves. This is likely to create additional demand for the commodity, thereby pushing the prices further up.
India's role in the Gold Market
Gold demand in India will see sustained growth in the next decade, strengthening it's position as the heart of the global gold market. Indian gold demand has grown 25% over the past decade. India remains a key driver of global gold demand and it is estimated that the global gold demand would increase by over 30% in real terms.
Research states the following key findings about Gold and it's affiliation to India —
• At more than 18,000 tonnes, Indian households hold the largest stock of gold in the world.
• Gold purchases in India accounted for 32% of the global total in 2010
• The vast majority of the Indian population (70%) live in villages, which have traditionally formed the source of more than two thirds of India's gold demand
Source: World Gold Council
Clearly, India plays an important role in the Gold market, the conservative mindset and the generic affiliation towards jewelry, working together to keep the demand high.
Gold Vs. The Rest
The performance of Gold as an asset class has been impressive, even over the long haul, hence hinting at the fact that it would make sense to have a part of your investments in Gold, which can act as a good hedge against inflation.
Source: World Gold Council; 30Dec2011
However, one should also remember not to get carried away and have too much exposure into Gold. Too much of anything could be detrimental to your financial health and hence it is necessary to invest moderately in various asset classes.
Investing in Gold
India has an easy affinity to towards jewelry, given their importance on all festive occasions. In ancient India gold jewelry came into being because during the olden days the people did not have access to banking and other financial instruments to preserve wealth. Jewelry at that time was the most convenient and most efficient medium of storing and preserving family wealth.
Jewelry however, does not qualify as an investment, if one intends to hold Gold in physical form, it is best to consider holding it in the form of coins, biscuits etc.,.
Gold ETFs are relatively less popular in India. These are open-ended mutual fund schemes that invest in standard gold bullion (0.995 purity). The investor's holding will be denoted in units that are listed on a stock exchange. They can be bought and sold on a real time basis, based on the price movement of Gold.
Gold Mutual Funds or Mining Funds launched lately in India are mainly feeder funds. They conduct investment through another fund which is the master fund, which has usually run successfully around the globe. Currently there are only 2 such Gold Mining Funds — AIG World Gold and DSPBR World Gold.
This is a product that combines the two themes of geographical diversification and an indirect exposure to gold. For instance, the GDM index, an index of gold miners, has moved up 6.5 times since 2000 as compared to gold price, that has increased by 3 times during this period.
Past Returns — ETFs & Mining Funds
Source: Valueresearch
At this point, Gold has corrected marginally, but it continues to be at sky high valuations and it may still be a good time to book partial profits. For someone who wants to initiate investments, it is best to plough in funds at every dip. If you are here for the long haul, then simply start a systematic investment plan in an ETF / Mining mutual fund and forget about it and when you do eventually look at it, you will be pleasantly surprised!
The author Mr. Anil Rego is the CEO and founder of Right Horizons, a leading end-to-end Investment Advisory and Wealth Management firm that focuses on providing financial solutions that is specific to customer needs.
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