GOLD - A FAVORABLE ALTERNATE INVESTMENT OPTION

The yellow metal has found favor due to the last year’s financial crisis and still continues to be favorable investment option due to weak sentiments toward the current economic uncertainty in some parts of the world.

The gold buyers tend to think investment in gold is protection from rising inflation and any currency devaluation, though we say that investing in gold is safe havens but still the exposure of gold investment when compared to that of other financial asset is very less, but now things are changing after the recent financial crisis in the western countries that led to the global depression and economic slowdown.

When Investors across the globe search to park their investment is safe havens, obviously it will be in gold which will not be affected due to any economic or political crisis.

For the last two years gold investment has deliver excellent returns due to which more and more investors especially the retail investors are much interested in investing in gold and are curious to know about gold price sustainability and the various opting available for gold investments.

As I am coming across the queries from the investors are almost same in nature, they want to know why gold price is rising and does it have the potential to rise further from the current levels, I think its valid questions before investing at high level.

First, one should know why the gold prices have surged so sharply and dose the reasons justify the gold price rise.

• Due to the global depression and economic slowdown the central bank across the globe had to increase the liquidity to provide the stimulus packages to revive the economy, which has led to the oversupply of paper currency, which in turn has led to higher inflation and weak currency, In such a case gold investment is hedge against both the above said factor and gold prices shoot up.


• As dollar getting weak the central bank across the globe are diversifying their reserves away from US $ to gold reserve the recent being India to do so by buying 200 tones from IMF due to which gold price has shoot up and many more countries are expected to do so, which will increase the demand for gold further in the coming days.


• The increase in demand for gold has outstripped the global gold production, the world major gold producing countries like South Africa, Australia and China could not increase the gold production and apart from this there has been no major gold discovery to compensate the demand side, due to which the prices in gold has shoot up.

Second, before investing in gold one should know whether the gold price will sustain at current levels and does it have the potential to go up further.

• As long as the dollar is weak ,uncertainty in the economy and financial crisis (Dubai debt crisis) continues there will interest towards the yellow metal.


• The rising inflation concerns and the awareness in gold investment among the investors to keep the interest alive in the yellow metal show.
  


• Lot of fund action has been seen in the yellow metal through Gold ETF, the gold holding of ETF stands at 7.05 tons and expected to go up further as more and more new investors showing interest toward the yellow metal.


• The central banks buying gold as reserves to keep the interest alive in the yellow metal.

Bloomberg quotes a statement from an influential Chinese official, who has suggested that Chinese central bank increase it gold reserve to 6000 metric tons in the next 3-5 years and possibly to 10000 tons in the next 8-10 years, if the Chinese central bank decides to buy at least 20%, imagine what would be the price of gold in the coming years.

As Chinese central bank moving out of US treasuries to gold, may trigger the gold prices to surge further from the current level.

As per one report the US government holds about 286.9 million Ounces of gold and has printed about $ 1.569 trillion worth of paper dollar, If each dollar were to be backed by gold then that would put the price of gold at $ 5468 an Ounces (source:commodityonline.com) .

The central bank across the globe are diverting their reserve away from dollar due to its weakness and the uncertainty prevailing in the global economy should keep the interest alive in the yellow metal and prices expected to go to the extent of 30%-40% from the current level in the next one year.

If one believes that gold prices will surge in the coming year and decided to invest in gold they should know the various options available to invest in gold.

Apart from the traditional option gold investment such as buying jewelry and gold coins etc., One has to look in for other available options, If you can effort to take some risk and interested in trading then go for newer options such as investing through commodity exchanges and Gold ETF (Exchange Traded Fund)

Investing through a commodity exchange you get leverage for your investment and opting for Gold ETF is to give your investment to be handled by professionals.

In the case commodity exchange you have to open a commodity trading account with a registered commodity brokerage house and then buy gold worth of 8 gms /100 gms / and 1000 gms by paying a up front margin of 5%-8% amount as margin money and hold it till the contract expires or rollover to the next available contract so that you can further carry your positions.

In case Gold ETF, you can buy it from the mutual fund which provide this scheme or directly through the equity brokers terminal the minimum is one unit and this one unit is equal to one gram and you have to make the full payment against the purchase.

My personal view is that one can buy gold on very dips with implement good strategy with the available options

If you have any questions with regard to gold investment option or strategies, please do email me at joerajendran@gmail.com