|Rediff India Abroad Home | All the sections|
How and why of investing in GOLD
Veena Venugopal, Outlook Money | January 05, 2007
The street to wealth in 2007 is certainly paved with gold. While equity, debt and real estate may form the core of your portfolio, investing in the yellow metal is an ideal money move this year, say experts.
Investing in gold comes without the drama of the stock markets, you do not have to track minute by minute price movements or be wary of what news flows will send a stock up or down. It also does not have the staidness of parking your money in long-term debt products.
Gold prices have been volatile, but well within ranges and though the metal has had a strong run in 2006 and prices were fairly high, analysts expect there will be a further appreciation. Outlook Money takes you through the hows and whys of investing in gold.
Why is 2007 a good year to buy gold? Every year is a good year for buying gold. It is a "defensive" investment in your portfolio and every penny you put into it is, well, worth its weight in gold, to borrow a clich�. The year 2007, however, promises much excitement in the gold (usually referred to as 'bullion') commodity market.
The key driver for gold prices is the gross mismatch between demand and supply. Indians are the biggest buyers of gold in the world. However, buyers in other large economies like Russia and China have also fallen for its lustre. In the last few months, demand has been at least 15 per cent more than supply, say experts. This is one force that will keep prices on an upward trajectory, they say.
Gold prices are linked to the strength of the dollar. With the dollar weakening and expected to continue doing so, the demand and price of gold would only rise. Central banks of several countries have started adding to their gold reserves. While China is certainly going to increase its bullion reserves and match that of other Organisation for Economic Cooperation and Development (OECD) countries, Russia is seeking to double its reserves and has started buying.
Latin American countries have also been steadily buying gold in the last few months. India also might be mulling a similar move. Former deputy governor of Reserve Bank of India, S S Tarapore, has stated the need for RBI to increase its bullion reserves as the share of gold in our forex reserves is down to 3.16 per cent.
The price of gold is expected to rise also because the cost of production is rising, says a Multi-Commodity Exchange (MCX) official. Moreover, activities in many African mines have reduced due to strife, adding to the low supply situation.
Price movements: The price of gold has been rather volatile, especially in the last six months. It is currently trading at $644 per ounce. Prices are expected to remain between $725-735 in the first quarter of 2007. There might be corrections and dip in prices, but analysts do not expect a sustained trend of falling prices in the bullion market.
However, the price of gold and the movements of the bullion markets are heavily correlated to global macro-economics. Any attempt to rationalise major currencies could affect the price of gold. Devaluation of the dollar, for now, is not imminent but a strong possibility.
The good news here is that, even if all these factors do come into play, analysts say that the price of gold would move sideways rather than drastically downwards. That's more than what you can say of equities!
What kind of gold should you buy? Gold can be bought in various forms and the decision should be based on the reason you need gold. If you see this purely as an investment, you can either buy it in the form of physical gold -- bars, biscuits and or coins or even in a dematerialised form.
For most Indians, gold purchases usually mean buying jewellery. This makes it the rare asset class that you can wear. However, the disadvantage of buying gold in the form of jewellery is that its resale is not always a profitable proposition.
For one, the jeweller discounts what you paid as 'making charges' or 'design charges' from the value of your jewellery. This shaves off a significant part (up to 40 per cent) of your investment. Its second disadvantage is that most jewellers do not give you cash in lieu of your gold. Instead they allow you to exchange it for gold -- jewellery or in a bar or coin form.
However, if your reason for buying gold is enjoying it and wearing it, never mind the value loss; go ahead and buy that necklace that has been calling out to you. However, gold bars and biscuits are ideal ways of investing in physical gold. These are priced at market value and can easily be exchanged for cash.
Though experts say that retail investments in gold should be in the physical form, the modern way to invest is buying dematerialised gold from a commodity exchange as this has its own advantages. The National Commodity & Derivatives Exchange (NCDEX) introduced 100 gram gold futures in November. With this, investors can take positions in gold and will have to give or take physical delivery on the contract's expiry.
The exchange also provides an easy avenue to enter and exit the market as he can always square off his position before the contract closes. Dematerialisation of gold eliminates risks related to physical storage and theft, reducing paper work and facilitating easy transfer of holdings through the electronic mode.
Where should you buy it from? There have been serious debates about the ideal places to buy gold from. This is especially relevant now as banks have also started retailing gold bars and coins to customers.
Bullion experts recommend that it is best to buy gold from a reputed jeweller. Banks that sell gold bars charge a premium as high as 15 per cent for providing you with a 'certificate of purity', but you are assured that the gold is pure. Leading jewellers in all cities also sell pure gold bars, but most do not give a certificate with it.
However, when it's time to sell your gold, the bank does not buy it back and the jeweller that you sell it to has no use for your certificate. You end up paying a premium for no real value addition.
If you buy gold bars or coins from reputed jewellers, not only do they buy it back from you, they also give you the prevailing market rate for it. Jewellers like Tribhovandas Bhimji Zaveri have their own certificates of purity, just in case that piece of paper makes you feel more secure.
In the dematerialised form, gold can only be bought in the commodity exchanges. But make sure your payments are made by cheques and don't forget to take a receipt.
Gold as fund: Gold can be used for wedding expenses or as wedding gifts for your children. It is best to gift gold rather than trying to sell it to meet other expenses. But, do not forget that sale of gold jewellery or bullion is taxable. The short-term (less than three years) rate is your marginal income tax and long-term (over three years) is 20 per cent with indexation.
It is evident that gold is an asset class that you can rarely go wrong with. However you look at it, gold dust is the colour of the New Year.