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Home > Business > Special

To beat inflation, invest in gold

Dilip Jha | April 02, 2007

When it comes to safe and sound investment, gold remains one of the most preferred choices. During the 1997-1998 South East Asia crisis, it was widely reported that when currencies lost their value, investors in gold were able to tide over the crisis.

As Chitra Pandya, head of liabilities and payment product group, HDFC Bank puts it: "Though the returns on gold may not be as high as the equity market, its less volatile nature along with its ability to provide investors a cushion against inflation makes it one of the best performing asset classes."

Gold is a well-known hedging instrument against inflation. This is primarily because with rising inflation, interest rates also rise, thus making investment instruments such as stocks and mutual funds costly.

This affects the returns given by them. In such a scenario, people start diverting their investible funds towards gold. Whereas the prices of shares can become zero, it cannot be so with gold.

However, in the last couple of years, there has been a clear shift in the quality of investment in gold. In the last two years, investors have shown increased interest towards gold coins.

Therefore, the demand for gold coins has increased by 15 per cent from 112 tonne in 2005 to 129 tonne in 2006.

Preferred choice

Every one prefers to own gold coins because they are available in variable quantities. Small investors, especially, prefer it because they can purchase small quantities and keep on adding to it, as and when they have surplus funds.

These coins are typically available in the denominations between 1 gm and 50 gm, making investments cheaper than other options such as gold bars, equities, real estates etc. There is also high liquidity in these coins as one can go to the nearest jeweller and sell it at the same value. In short, the basic advantages of owing coins are - high liquidity and assured return.

However, one should remember the returns on investment in gold bar is slightly higher than that in gold coins. Also, buying from government nominated agencies such as National Refineries, AVI Industries and NIBR Bullion makes sense as there are a whole lot of counterfeit gold coins in circulation.

Investment benefits

It is interesting to note while one can invest in other products within the gold family such as gold bars and jewellery, coins are the best options. This is because banks, who sell coins and bars, do not buy them back.

So you will need to sell it to the unorganised segment, where the jewellers always claim the bar has lost weight, and jewellery will fetch even lesser because there is a huge cost incurred as 'making charges'.

This is unlike gold coins, the weight of which is embossed on the coins itself by institutions and banks selling them. So, there is hardly any scope of negotiation. As Haresh Kewalramani, director, the Bombay Bullion Association, puts it: "As long as purity is maintained, I have no problems buying gold coins from holders."

Branded coins

Government nominated agencies including NIBR Bullion, National Refineries, Narrondas Mannordas and AVI industries are selling gold coins with their own brand names. A number of PSU banks and private banks including ICICI, HDFC, Nova Scotia, and others sell coins with their own company stamps.

The main difference between the two (government nominated agencies and the banks) selling coins is that the agencies sell home-made coins with bars importing either from overseas or through PSU banks.

But banks have been selling with their own brand with ready coins imported from overseas primarily from Switzerland. The banks charge about 5-10 per cent premium on gold coins across the board, as there are higher making charges and duties paid by them at the time of procurement.

Returns from investment in coins can be clearly seen from the fact that the commodity's price grew 10.11 per cent in rupee term and 12.82 per cent in dollar term during 2006-07. In Mumbai, it closed at Rs 9,310 per 10 gm on March 26 against Rs 8,455 on April 1, 2006.

In London, the price perked up to $660 an ounce from $585 an ounce in the same period. In fact, there was a good buying opportunity when the prices crashed to Rs 8,805 in January, 2007.

Of course, returns from other investment instruments such as equities were to the tune of 15 per cent and real estate scored even better, but gold is unaffected by swings in equity and bond markets. And, it acts as a stabiliser in your portfolio, as well.

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