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Gold - what you must know this Diwali

You can feel it, touch it, wear it, admire it....but are you familiar with what makes Gold so special and different. This festive season we want to share with you a quick primer on Gold so that you can learn more about why it has captured the imagination of royalty, investors and households for 1000s of years. And, if you are in the market to buy some Gold this holiday season, its even more important that you spend the next 2 minutes reading this simple guide.

Watch the video

Important Characteristics of Gold

1. Precious Metal because of Limited Supply: Its obvious, Gold is a precious metal, known for its "glittering" qualities. What is less known is that its precious not only because of its superficial quality, but also its scarce nature gives it a lot of intrinsic worth as well. There are only limited amounts of know reserves of Gold in the world, and this is one of the things that drives its price.
2. Store of Value: Because the supply of Gold is finite, Gold is seen as a store of value. For this reason, many consider it the best protection against inflation. History has shown that the value of paper money goes down over time, and for this reason they invest in Gold because the more money is needed to buy the same amount of Gold.
3. Safety: Whenever there is an international geopolitical or economic crisis, Gold will likely shoot up in value immediately. This is because at uncertain times, when economies slow down or stock markets are correcting, Gold is seen as a safe and secure asset to hold.
4. Lack of Income: Unlike other assets, Gold does not generate any income. Those who argue against investing in Gold, believe that it is a useless investment because unlike stocks or bonds or fixed deposits, it does not generate any dividends or interest income.
5. Storage and Purity: Unlike paper assets like stocks or bonds, Gold has storage costs associated with it. Paper assets held in the form of certificates or property deeds are registered in the investor's name, and cannot be misappropriated. On the other hand, physical Gold can be stolen. Additionally, when one buys the physical metal, one must be sure that its pure. Often many jewellers might be able to get away with less pure Gold than what they charge you for.

The Role of Gold in Your Portfolio

Research has shown that Gold adds stability to a diversified investment portfolio. Experts recommend that your portfolio must include up to 10% allocation to Gold.

In the Indian context, many families have a lot of their wealth in the form of Gold jewellery, and so one could make the observation that we Indians are over allocated to Gold. This is not something you should worry about if this applies to you. However, we would suggest that going forward, you might want to consider investing in a family home and in other long-term investment assets such as stocks and bonds that generate income that can be used towards funding financial goals such as children's education or parents' retirement. This can allow you to diversify into a more balanced portfolio.

How to Buy Gold

In today's world, even in India, there are many options to buy Gold.

• Jeweller: You can buy Gold jewellery but the risk is one of purity. Additionally, if you go to re-sell your Gold for cash, it is unlikely that you will be able to recover the full cost of workmanship. Also, this process might take time.
• Coins and Bars: You can invest in Gold through certified coins and bars. Many banks sell bars of the highest type of purity. There might be some places where you can buy Gold "guineas" that were in circulation about a century ago. In some countries like the US and South Africa, there are national mints that print Gold coins that can be readily bought by anyone.
• Exchange Traded Funds: This is a new form of owning Gold in India - by buying a security listed on the stock exchange that gives you ownership of the underlying metal. While you own the metal, you don't keep physical possession of it, so your storage costs are zero. It's a more convenient way of owning the metal, with the flexibility to sell the Gold and readily convert it into cash.

Gold prices can be volatile during certain cycles, so if you are gambling on prices going up, be sure you can protect your downside. If you are buying to invest for a wedding or similar event, then you are best off if you buy it periodically, as your funds permit.

Comments

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vinita sinha said : 01/10/2009	There are many Banks that are selling gold coins of 99.99%purity. However they do not offer any liquidity -they are neither ready to buy back or extend loans against them. All gold investmnents may ot necessarily be converted to jwellery. Thus investments in gold becomes a blocked investment.
Manoj Barik said : 29/09/2009	Vey good info. but one thing missing the rate factor and whether its beneficial to buy this diwali or not.
Sanjay said : 29/09/2009	Please guide is their any default risk in ETF. Paper Gold VS Physical Gold.