Gold holdings

A local investor has asked about the scenario of investment in gold. In his email, he has quoted recent skirmishes between India and Pakistan when their soldiers were in an eyeball to eyeball contact with each other. The investor has also referred to parliamentary elections which are now a few weeks away. In such situations, he says, the investors are pushed into a dilemma as they find too much of uncertainty hovering around the markets.

“Is investment in gold safe during the times of political unrest?” He asked.

When we look at investment in metals, we find that of all the precious metals gold is the most popular mode of investment. People have intrinsic love to store their wealth in gold as it’s considered most dependable metal during uncertainties and economic crises. Time has proved that gold is more stable and liquid than any other asset classes and has acted as a strong wall against any crises.

As far as professional investors are concerned, let me reiterate that they should increase their look for exposure to gold if the economy and stock markets are highly volatile and lots of uncertainties are visible. For the sake of diversification and hedge against market uncertainties, experts have always favoured 2-5 per cent investment in gold in normal circumstances. Otherwise, it should be 10 per cent. However the ideal way to invest in gold is to invest in it regularly. And this way one can average out his price purchase to lay hand on higher returns when one decides to en-cash his gold holdings.

Currently, gold price has been on a steady decline over the past couple of months as it fell by over 4% as on March 28. On February 01, its price was Rs.33,262 per 10 grams and fell to Rs.31,854 during the period. The decline in price is contrary to the international spot price which witnessed a marginal decline of less than 1%.

Here the point is that falling price of gold in the domestic market should not be a temptation to invest in gold as one has to understand the dynamics of declining price scenario. The standing of the Indian rupee against the US dollar is key factor to drive gold prices in the domestic market. India is mostly dependent on imports for domestic demand for gold. Thus, the gold is to be purchased essentially in dollars. So when the rupee weakens against the US dollar, the price for imports like gold goes up and vice-versa.

Precisely, the current change in price is because of the rupee appreciation. The rupee has appreciated because of the strong inflow of funds in the markets. When in September-October last year, the rupee depreciated to Rs.74.38 against the US dollar, the gold price in domestic market was recorded at highest levels in the past six years. Now, when the rupee appreciated against the dollar, the gold price came down by over 4%.

Meanwhile, exploring investment opportunities in gold is not cumbersome now. You can can own gold in dematerialized form via Exchange-Traded Gold Funds or ETFs instead of owning it in physical form. Over a period of time, the gold ETF has emerged as a most convenient and investor-friendly medium of investing. Its units represent physical gold that is 99.5% pure, with each unit representing 1 gram of gold. The units are traded on the stock exchanges like a stock of a company.

Gold ETFs absolve the investors from the worries on adulteration or impurities. Besides, an investor can track value of his investment in real time and off load it as and when needed by him. Selling and buying of the commodity in physical form involves a cost. The costs are involved in ETFs also, but here these are much lower than the expenses involved in buying – selling of gold in physical form.

Precisely, gold ETFs have wriggled themselves into a niche in today’s gold market by providing a platform for investors to invest in gold who ordinarily would not, without exerting too much effort.

To conclude, one can go for the steady accumulation of gold as an asset creation to derive maximum benefit,. Don’t wait for prices to come down in order to buy it. We have witnessed greater upward movement of gold prices than the downward movements. So, this also means anytime is a good time to buy gold.

(The views are of the author and not that of the institution he works for.)