Worth Its Weight In Gold

Gold prices are linked to the strength of the dollar. The dollar is expected to weaken over the long-term and thus the demand and price of gold is expected to rise. Central banks of several countries have started adding to their gold reserves, notably RBI has recently bought 200 MT of gold from IMF. In the last 18 months, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%. This goes on to prove that gold will continue to hold its position as an alternative investment.

Gold can be bought in various forms and shapes. If you plan to buy gold as an investment, you can either buy it in the form of physical gold - bars, biscuits and/or coins or as exchange traded funds (ETF).

For most of us (Indians), gold purchases usually mean buying jewellery. Gold is perhaps the only asset class that you can wear (except to some extent platinum and silver). However, the disadvantage of buying gold in the form of jewellery is that its resale is hardly ever profitable. This is because when you go to sell the jewellery, the jeweller discounts what you paid as 'making charges' from the value of your jewellery. This shaves off a significant part of your investment. Its second disadvantage is that most jewellers do not give you cash for your gold, instead they allow you to exchange it for gold - jewellery or maybe a bar or coin making your investment in gold permanent. However, if your reason for buying gold is enjoying, wearing or flaunting it, just go for it.

Secondly, gold bars, biscuits and/or coin is another way of investing in physical gold. Again, here banks that sell gold bars charge a premium/commission as high as 10-15 percent for providing you with a 'certificate of purity'. However, when it's time to sell your gold, the bank does not buy it back and the jeweller that you sell it to will not pay for the certificate. So actually you end up paying a premium with no real value addition.

Finally, the exchange traded funds or ETFs. ETFs are the best way of investing in gold because it trades like a share, can be bought or sold in the exchanges and the price is the market price of gold. It is safe because gold ETF ensures that the custody and quality of gold is consistent. It is secure because the custodian (fund houses) stores the physical gold when they sell the ETF units. The transactions are secure because it takes place in stock exchanges and electronically. The costs involved are low as the expenses incurred in buying and selling Gold ETF are much lower than the cost of physical gold (commissions to the bank or making charge to the jweller).

An investment in gold should be based on macroeconomic considerations, i.e., fears of rising inflation, destabilizing deflation, or another financial crisis. A reasonable allocation in a conservative, diversified portfolio should be anywhere between 0 to 3%.

It should be noted equities or mutual funds dealing with gold mining companies offer greater leverage than direct ownership of the metal itself.

Today, like all investments and commodities, the price of gold is ultimately driven by demand and supply. Unlike most other commodities chances are that most of the gold ever mined still exists and is potentially able to come on to the market for the right price.