Gold as an Investment Option

Gold jewellery traditionally has been a favourite of the Indian women. Investment in gold has often been a bone of contention between the spouses in the family. So the next time if the lady of the house wants to buy gold the men folk should not discourage her, but guide her to buy and store gold in a more profitable way. Let us see how?

Historic perspective: The world stock of Gold as at the end of 2007 was 161,000 tons of which 51% existed in the form of jewellery. Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72% of world demand in 2007. 55% of demand 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. Jewellery accounts for around three-quarters of gold demand. In the 12 months to December 2007, this amounted to US$54 billion, making jewellery one of the world's largest categories of consumer goods. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25% of demand in 2007.

There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold's abilities to insure against uncertainty and instability and protect against risk. On average, governments hold around 10% of their official reserves as gold, although the proportion varies country-by-country.

Asset allocation is an important aspect of any investment strategy. To counter adverse movements in a particular asset or asset class, many investors now strive to achieve more effective diversification in their portfolios by incorporating alternative investments such as commodities. Even a small allocation to gold may significantly improve the consistency of portfolio performance during both stable and unstable financial periods. Gold is widely considered to be a particularly effective hedge against fluctuations in the US dollar, the world's main trading currency. Gold is unique in that it does not carry a credit risk.

What is the most rewarding way of investment in Gold?

• Investment in Jewellery/ Gold bars: Investment in jewellery form is the most innefficient way of investment in gold, as the making charges are too high and resale value is very low. Gold bars are an alternative, but they carry the risk of storage and theft.
• Buying Gold on Commodity Exchanges: It does not tentamount to investment but speculation and the brokerage paid is quite high.
• Buying Gold ETF's: By design, these forms of securitised gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form. In Indias currently 5 Mutual Funds are offering Gold ETF's. If you have to invest in gold, invest through this option. Your investments are totally safe and are subject to long term capital gains after one year like other MF schemes.

Ideally, one's portfoilo should hold 5-10% in gold.