Increase in gold prices has given a fresh opportunity to the investors

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Published on March 15, 2014

Author: unitedworldmba

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Increase in gold prices has given a fresh opportunity to the investors

Increase in gold prices has given a fresh opportunity to the investors to invest their money in the new emerging asset (for the motion) Submitted by : Anushree Mazumdar Sec- c Introduction : Gold, the most precious metal of all, is also a popular form of investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the 2007–2012 global financial crisis, suggest that gold behaves more like a currency than a commodity. Investment Vehicles Bars : The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Canada, Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or

sold at the major banks. Alternatively, there are bullion dealers that provide the same service. Bars are available in various sizes. Coins : Gold coins are a common way of owning gold. Bullion coins are priced according to their fine weight, plus a small premium based on supply and demand. The Krugerrand is the most widely-held gold bullion coin, with 46,000,000 troy ounces (1,400 tonnes) in circulation. Other common gold bullion coins include the Australian Gold Nugget, American Gold Eagle, Canadian Gold Maple Leaf, Chinese Gold Panda etc. Coins may be purchased from a variety of dealers both large and small. Fake gold coins are not uncommon, and are usually made of gold- plated lead.

Exchange-traded products (ETPs): Gold exchange-traded products may include exchange-traded funds (ETFs), exchange-traded notes (ETNs), and closed-end funds (CEFs) which are traded like shares on the major stock exchanges. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the Australian Stock Exchange. Gold ETPs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Certificates: Gold certificates allow gold investors to avoid the risks and costs associated with the transfer and storage of physical bullion (such as theft and metallurgical assay costs) by taking on a different set of risks and costs associated with the certificate itself (such as commissions, storage fees, and various types of credit risk). Accounts Many types of gold "accounts" are available. Different accounts impose varying types of intermediation between the client and their gold. One of the most important differences between accounts is whether the gold is held on an allocated (fully reserved) or unallocated (pooled) basis. Unallocated gold accounts are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuer's gold on deposit. Mining companies: Instead of buying gold itself, investors can buy the companies that produce the gold as shares in gold mining companies. If the gold price rises, the profits of the gold mining company could be expected to rise and the worth of the company will rise and presumably the share price will also rise. Gold price : Gold has been used throughout history as “money” and has been a relative standard for currency equivalents to economic regions or countries, until recent times. From July 2011 the pace of increase in gold prices has, however, accelerated further and in the third quarter of 2011, gold prices rose much faster. The spurt in gold prices which occurred in 2011 took place in the background of worsening of financial and economic scenarios initially in the US, followed by the debt problems in the European Countries. As a result of these adverse global developments and “flight to quality”, gold is emerging as a “safe” asset for investment purposes.

Graph depicting Indian and international rise in gold price Factors influencing the gold price: 1) Demand and supply : Today, like most commodities, the price of gold is driven by supply and demand. Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment (demand), rather than changes in annual production (supply). According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. 2) Central Banks : Central banks and the International Monetary Fund play an important role in the gold price. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves. The ten year Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, were key sellers of gold over this period. The central banks do not generally announce gold purchases in advance but few like China, announced in early 2006 to only hold 1.3% of its reserves in gold and also announced that it

was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.  Interest Rate : It is generally believed that interest rates are closely related to the price of gold. As interest rates rise the general tendency is for the gold price, which earns no interest, to fall, and as rates dip, for gold price to rise. As a result, gold price can be closely correlated to central banks via the monetary policy decisions made by them related to interest rates. For example - if market signals indicate the possibility of prolonged inflation, central banks may decide to enact policies such as a hike in interest rates that could affect the price of gold in order to quell the inflation. An opposite reaction to this general principle can be seen after the European Central bank raised its interest rate on April 7, 2011 for the first time. The price of gold responded with a muted response and then drove higher to hit new highs one day later. A similar situation happened in India: In August 2011 when the interest rate were at their highest in two years, the price of gold responded with a muted response and then drove higher to hit new highs. 3) Hedge against financial stress: Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation. As Joe Foster, portfolio manager of the New York-based Van Eck International Gold Fund, explained in September 2010: The currencies of all the major countries, including ours, are under severe pressure because of massive government deficits. The more money that is pumped into these economies – the printing of money basically – then the less valuable the currencies become. If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals. Impact of rise in Gold price: The impact of the rise in international gold prices is reflected in its domestic prices as well. Despite the sharp recent price rise, in India, demand for gold has sustained, not only as a component of safe savings but also due to its social and cultural importance. Therefore, movements in gold prices in India are of keen interest to

all segments of the society including investors. From the policy perspective, gold’s price rise has raised a concern as to whether a future crash in gold prices would have financial stability implications. India and Gold : Gold is luring Indians despite the fact that the yellow metal prices are just zooming day by day. Whether gold price is low or high, the mesmerizing yellow metal is luring Indians. Mothers across India cannot think of marring off their daughters without gifting them as much gold as possible. Devotees, especially of the Hindu religion, are obsessed with gold that they gift them as divine donations to goddesses. For instance, the Lord Venkateswara temple at Tirupati in the southern India state of Andhra Pradesh has tons of gold in its vault, all of them gifted by devotees. But temples in India have turned richer, and nationalized banks in India are managing the gold assets in temples. It would not be surprising if India will have something like India Temple Gold ETFs, to manage the huge assets of gold across the Indian temples. Having said this it is a fact that Indians are crazy about owning gold. the Indian household held physical gold more than 15,000 tons, which is the largest in the world. May be, no other country’s people would be wearing and owning so much gold as Indians do. Indians believe that gold is an essential buy for family’s wealth and protection. From time immemorial, families across India have bought and accumulated gold and hand them over to the new generations. The unabated hunger for gold has helped the bullion industry to thrive in India. So India is today the world’s largest consumer and importer of gold. India imports around 700 tons of gold every year. Hundreds of gold jewellery shops are coming up every year across Indian cities and towns. Gold ETFs are gaining in popularity in India. Gold financing companies are sprouting up across India. Some of the large gold financing companies like Muthoot Finance and Manappuram Group have been listed in Indian stock exchanges, thanks to the gold they own from families who pawn the yellow metal in exchange for cash. Gold vs other asset class : This graph shows how bonds and especially Gold have outperformed the stock market since the depictingyear 2000 higher returns than any other assets class.

Hence, Gold has been one of the best performing assets over the last few years. Therefore gold is the most preferred asset than any other asset class, because: Gold investment performs best when other investment options like stocks, real estate Historically the gold investment has been slow but provided a very steady return. In the past one year (in 2009/2010) gold price has increased by more than 30%. Real Estate investment which can be called as a closes safe investment option to gold has lost more than 70% value during the recent financial turmoil of 2008. Gold can be considered a recession proof investment option. Gold bullions in the form of coins and bars are perhaps the best form of assets. The denominations is which he gold bullions are available are small and tradable. You need investment a huge amount at a time (unlike real estate) of investment. Oil is another investment option whose growth is as robust as gold, but common investors can invest in oil only through funds by paying commissions. But in gold investment no commission is required. Gold is also one of the most liquid asset after cash. In times of extreme urgency people can easily sell gold bullion for cash. Gold value remains stable even when dollar value is crashing. Instead an opposite is often true like now, the value of dollar is diminishing and people/ government agencies are buying more and more of gold. Gold is one asset which has beaten inflation in all times. Conclusion: To summarise, gold is unique asset class. Gold offers investors an attractive opportunity to diversify their portfolios. Investors can make the most out of its appreciating value potential without going through the hassles of physically possessing it, through Gold ETFs and Fund of Funds (FoFs). Better still, one may invest a small amount through SIP in Gold FoFs. So invest now and enjoy its growth potential. As per as India is concerned, Gold will continue to lure Indians even if gold prices zoom to Rs 50,000 per ten grams in the next few years. Let us hope that in a few years the Indian government would launch some kind of a mega India Gold Fund to manage the countries amazing wealth of gold.

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