Go for gold

Golden Story

Between 1990 and date, gold has risen by 6.15 per cent per annum while equity has grown by 20.6 per cent per annum.

The standard deviation of monthly movement in gold prices is 3.8 per cent while that of equity is 9.3 per cent, suggesting less volatility in gold.

Sheen of returns

V. Pattabhi Ram

T. N. Madhan

'Gold', as an investment option, has been in the news in recent times. Suddenly every analyst is suggesting that gold should form part of every portfolio. And they are right.

Date with Gold

Humans have an eternal date with gold. In 1849, when gold was discovered in California, thousands of men rushed in for a share of the booty. Some managed to mine the gold, many returned home sadder and poorer but wiser while others died in the punishing ordeal.

During financial crisis, countries have turned to gold for help. In 1931, when agricultural production slumped, India sold 1,400 tonnes of gold. Sixty years later, in 1991, the Indian government shipped out 45 tonnes of gold to temporarily bail India out of a severe money crunch. It was the word 'gold', and not the word of the government of India, which was heard. Elsewhere, in 1979 at the height of the oil crisis, the US dollar was devalued; the Arabs, lost confidence in the dollar and began buying gold.

The alternative global currency

Gold has application in three major areas — jewellery, industry and investment. Jewellery accounts for 60 per cent of the demand for gold. India is the largest consumer of gold in the world and accounts for one-fifth of the global gold trade.Interestingly, around 30 per cent of global demand comes from investors who trade in gold exchange traded funds and from countries that hold gold as an alternative global currency. In recent times, gold prices have risen sharply. Bulk of the demand has come from those intending to hold it as an investment although the demand in the jewellery and industrial segments did show some growth.

There are three reasons for this spurt. One, investors have been shifting from equities to gold. The US economy has been spinning into a recession because of huge deficits and bumper consumer spending. The recent sub-prime crisis added to the woes as investors accelerated the shift. Two, the dollar has ceased to be a global currency. With the once mighty dollar losing its grip, Asian countries have begun substituting dollars with gold in their investment portfolio. Three, China, which once did not allow people to own gold, has since deregulated. In 2002, the Shanghai Gold Exchange was formed, opening up the demand floodgates so much so that by 2007, China overtook the US to become the second largest consumer of gold in the world.

Investing in Gold

One of the easiest ways of investing in gold is through the exchange traded route. This involves low transaction costs and there is no holding cost as well. Of course this involves holding gold in 'demat' form and is at best an investment as it would not serve the ornamental purpose. In India, apart from the exchange traded funds, gold can be bought and sold in MCX (multi-commodity exchange).

On May 8, 2008, MCX launched a new futures contract in gold to enable retail investors to buy and sell gold in lots of 8 gm, the standard size in the physical market. Investors can take future positions by paying 4-7 per cent of the contract value as margin. .

In essence, 5 per cent of your portfolio as gold could add glitter to it.

Way Forward

Going forward, gold prices are likely to stay firm. There are two reasons for this. One, of every 100 tonnes of gold, 70 tonnes come from gold mines. Of this, 35 tonnes come from eight countries alone. But the production of gold in some of these countries is stagnating due to factors such as exhaustion of 'inexpensively mine-able' gold resources and strict environmental laws. Two, about 25 of the 100 tonnes comes from sale of gold reserves by countries. A treaty signed in 1999 provided for sale of 400 tonnes of gold annually by participating banks. This agreement expires next year and there are no signs of renewal.