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Gold - A sparkling choice

| 12/16/2011 11:50 AM Friday

Gold, I believe is a foundation asset. More than an alternative investment, it should be viewed as an integral part of any portfolio, as it helps investors diversify their portfolios and manage risk more effectively.

Contrary to popular belief, gold is considerably less volatile than many assets. With an annual long-term volatility of approximately 16 per cent, gold is less volatile than most, if not all, commonly traded commodities. It is also less volatile, on an average, than most equity indices. Moreover, when the overall market volatility goes up, gold’s volatility does not rise as much, and comparatively speaking, it remains more balanced. This is a by-product of the rich and diverse dynamics of demand and supply that the gold market exhibits. There are many reasons and ways to own gold, which helps to keep volatility tamed.    

If one looks at the investment demand, including that for bars, coins and ETFs, it was 296 tonnes in Q3 2011, an increase of 25.5 per cent in volume terms from the 235.8 tonnes recorded in Q3 2010. In value terms, this was an increase of 60.76 per cent to Rs 660376 crore from Rs 410763 crore in the corresponding period. The supportive background for Indian demand in 2012 remains very much in place, with inflation still a concern and price expectations among Indian investors remaining positive. To top this, the successful monsoon season this year should yield good crops, which in turn, should help to ease food inflation, while also bolstering rural incomes.

In India, there is a fine line between investment and jewellery demand. While the cultural context to gold consumption is deep rooted, this is also mainly because of the embedded investment value that it bears. For example, gold jewellery gifted to the bride during her wedding serves as ‘Streedhan’ or social security for her future, and also symbolises the social status of her husband and family. On the other hand, investors accumulating coins as pure investment/savings also often end up converting them into jewellery for future use.

Following a period of economic uncertainty and market volatility, the unique investment qualities of gold are now more widely understood. This role is supported by the fundamentals of rising demand, constrained mine production and the recent shift in behaviour by central banks, which have become net purchasers of gold. In the aftermath of the credit crunch, investors are switching to a strategy of wealth preservation rather than speculation. Within this context, gold's diversification qualities and its ability to mitigate macro risks has led to renewed strength in investment demand for gold across the board.

While the World Gold Council does not comment on the future direction of gold prices, the metal is unarguably of central importance to an investment portfolio. Investors have traditionally invested in gold for its long-term, strategic benefits – as a currency hedge, an inflation hedge and a portfolio diversifier. It is a highly liquid, low-risk asset. Short term price rises or falls will not alter this long-term approach to gold as an investment, especially as the demand and supply fundamentals suggest a robust future for its demand.  

There are many ways to invest in gold, and investors can identify the most appropriate way as per their convenience. For example, if the person is buying gold for a wedding or as a gift, physical gold may be appropriate. If the purchase is for pure investment, ETFs, Gold Funds or e-Gold are the available options.

I would not like to comment on aspects such as when to buy or how much to buy, as the World Gold Council does not give investment advice. However, our research shows that there is a strong case for gold to be a long-term holding in a portfolio.

- Ajay Mitra, Managing Director – India and Middle East, World Gold Council

 

Find More Articles on: DSIJ Magazine, Gold Strategy

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