All that glitters is 'Gold'

This age old adage seems apt if you consider the returns an investment in gold has delivered in the recent times. It is appropriate to review the 'Gold phenemenon' on the auspicious occasion of 'Dhanteras'. Dhanteras, also known as Dhantrayodashi, takes place two days before Diwali in honour of Dhanavantri, the physician of the gods and an incarnation of Vishnu. Dhanteras falls on the thirteenth day of the month of ashwin. The word "Dhan" means wealth. As such this day of the five-day diwali festival has a great importance for the rich mercantile community of north-western India. On this auspicious day women purchase some gold or silver or at least one or two new utensils.

Gold has been the best performing asset class during the past decade, delivering a return (CAGR) of 19% per annum during 2001-11. Analysts are advising investment in gold at declines as the major trend continues to be up. Gold is a unique asset class that delivers similar returns across the globe (the returns may vary according to the appreciation/ depreciation of currencies). Gold became a standard of monetary value as per the gold standard, where monetary authorities offered a guaranteed return in exchange for the paper currency. However, the gold standard was abandoned in 1970's leading to a free float in gold prices. Indians have been using gold as a store of value for over 5000 years, according to one estimate privately held gold with Indians is over 15000 tons. India currently accounts for over 38% of world gold demand.

The rise of gold prices is also linked to the 'fear index'. Most of the action in gold prices since 2002 has been attributed to the actions of the US FED. The weakness of US economy has lead to huge budget deficits which are financed through printing of dollars. The lack of suitable investment avenues has lead to the excess dollars fuelling commodity prices, including gold. The Eurozone crises has also increased the fear index helping investors to seek safe heavens such as gold. The preference of Indians towards gold is still strong, however, the mode of holding gold has undergone change in the past few years. more and more investors now prefer investment through paper gold as compared to physical gold. At the end of September 2011 the investment in Gold ETFs has gone up to Rs.8200 crores. The volumes at commodity excahanges have also gone up substantially in the recent past.

Financial planners also  recommend investors to hold 5-15% gold in their portfolio, as gold acts as a hedge against other asset classes. So go ahead, and make your portfolio glitter with gold this 'dhanteras'.