Introduction to Investing in Gold

Introduction to Investing in Gold

31 May 2018

Gold is one of the first known metals and has been coveted throughout history for its malleability, scarcity, beauty, uncanny resistance to corrosion and rust. Gold has traditionally been the currency of choice for a larger part of the population in the world because of its unique properties. As the value of Gold surpassed all cultural, national and political borders, it has become an ideal basis for the valuation of currency.

Different Ways of Owning Gold One of the main differences between investing in gold several hundred years ago and investing in gold today is that there are many more options to participate in the intrinsic qualities that gold offers. Today, investors can invest in gold by buying:

  • Gold Coins - Apart from the local jeweller, one can also buy gold coins from banks, the Stock Holding Corporation of India, MMTC (a government-authorized public sector unit for the sale of gold and silver), and non-banking financial companies like Muthoot Group,etc.
  • Gold Bullion - Bullion means the bulk quantity of precious metal, such as gold bars. The advantage of gold coins over gold bars is that they allow you to be more flexible.
  • Gold jewellery - Gold jewellery is not only a fashionable ornament but doubles itself as an investment for many.
  • Gold Mutual Funds - A mutual fund that invests primarily in gold-producing companies or gold bullion. The price of shares within a gold fund should correlate very closely to the spot price of gold itself, assuming that the fund holds the majority of its assets in bullion or in the stocks and bonds of gold miners and manufacturers.
  • Gold ETFs - Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion of 99.5 % purity. These funds are of an open-ended nature that trade on a stock exchange just like the shares of an individual company.
  • Gold Companies - Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion of 99.5 % purity. These funds are of an open-ended nature that trade on a stock exchange just like the shares of an individual company.
  • Gold Futures - Gold futures are exchange-traded standardized contracts between a buyer and a seller in which the buyer is bound by an obligatory contract to take delivery of a specific quantity of gold (lot) at a certain pre-decided price on a future date. You can enter in long positions or short by paying approximately 7%-10% margin and need not pay the full amount until you are going for physical delivery.

In the past few years, the price of gold has always been impacted by the following factors:

1. Weak United States (US) Dollar – The key driver for Gold is US Dollar. Gold is the anti-dollar with a high inverse correlation to the dollar.

2. Growth in demand for jewellery – There has been a regular growth year on year in the demand for gold jewellery. China, India, Turkey, USA and Italy are the countries that are primarily responsible for this growth. The Indian market is the largest in the world for Gold demand.

3. Increase in demand for exchange-traded paper backed products – You can purchase Gold like any listed stock at select stock exchanges of the world like New York Stock Exchange (Street Tracks Gold), London Stock Exchange and Australian Stock Exchange (Gold Bullion Securities).

In the long run, even if there has been a substantial increase in Gold prices, the customer’s inclination towards Gold investment has not dampened at all. Love for gold is rooted in the Indian tradition. However, the craze for buying it rose exponentially in the last three decades making India the largest importer of bullion in the world. Today, investors consider the effectiveness of Gold as an alternative asset class and an effective savings vehicle.

Benefits of Gold in a portfolio can be explained through the following points:

1. Low to negative correlation with most other asset classes.

2. The consistency of portfolio performance improves during both stable and unstable periods if there is an allocation to Gold in an investment portfolio.

3. Performance of the industry, economy or companies is not linked to the price of Gold.

4. Gold offers the benefit of diversifying portfolio risks.

Gold won't give you exceptional returns but Gold might shine brightly if global woes are going to linger for a long time. There are advantages to every investment. You can directly hold gold by buying physical gold in the form of bars and coins ; if you only want to see the marginal impact of gold fluctuation, then buying the shares of gold mining companies is a relatively better option. In case you only want to enjoy prices rally in gold from a medium to long term perspective, then buying Gold ETF or Gold Mutual Fund is a better option apart from buying jewellery which is more of a fashion or a religious symbol.

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