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Ten reasons for investing in gold
UNDERSTANDING the uncertainty in the equity markets around the world, gold has become a very popular mode of investment. Today, the financial planners and analysts advise investors to diversify the portfolio and include metals like gold and silver as a hedge in the portfolio.
Gold, since May 2011, has risen by over 25 per cent, also making them favourite for investors betting on market capitalisation.
Gold is a liquid asset, which can be held in various forms like physical gold, ornaments or exchange traded funds (ETFs).
Here are 10 reasons why you should prefer to buy gold.
■ Portfolio allocation strategy: While constructing a portfolio, it is important to have a range of asset classes running alongside (all eggs not in one basket principle), to decrease the risk of the portfolio. All asset classes have different returns (based on highrisk-high-return strategy). Along with equity and debt, gold forms to be an important asset class.
■ Hedge against inflation: The value of gold has increased defeating the forces of inflation.
The purchasing power of gold to other assets has been increasing slow and steady, but and is less volatile.
■ Hedge against currency: Gold, usually traded in the US dollars, is seen as a safer haven, opposed to holding physical currency of any country. As soon as dollar prices decline to major currencies around the world, the gold prices see an inherent upward change. There is an inverse relation seen between the dollar (against other currencies) and gold.
■ Change in prices: Change in prices is often referred to as volatility and, gold as an asset class, remains less volatile, opposed to others like equity, real estate and debt. We have observed violent changes upwards and downwards in the equity markets in recent times, but gold continue to be less volatile. Rising demand: Central banks on reasons as stated above, have started buying gold as a part of the assets they hold.
It is therefore, by mere market capitalization, the prices of gold recently have sored very high. The investment demand also continues to become high due to the increase in monetary base globally.
Safe haven: It is usually seen that when equity markets become risky or unstable, the price of gold increases instantly. This phenomenon can be seen through the yesteryears. Gold is therefore, considered as a safe haven. This was once again observed in the past three months.
Fossil fuel like future: Gold mines for production is becoming limited day-by-day, and there are fewer sites being found for further mining. The stage of mining extension is nearing soon.
Central bank gold agreement (CBGA): With the CBGA, and its signatories becom ing buyers, the supply continues to remain lower to the demand, making gold prices go higher at each level. No credit risk: Gold continues to be an asset which `holds value', and unlike debt, it does not pose a credit risk. Credit risk has been one of the largest problems that the US and Europe have faced in recent times.
■ Seasonal patterns: Patterns in buying gold are seasonal in nature, opposed to the regular buying in the open market. Regular tracking can ensure regular profits in intervals from such periods.
Availability of gold and different forms in India: Gold can be acquired through other means also.
Availability of e-gold has made demand of gold increase manyfolds. ETFs in the commodity markets are now used for regular gold investment. These options have made gold buying easy and safe. There is no problem of storage. It comes in paper form.
■ Gold (commodities): Can be traded in gold futures through Multi Commodity Exchange of India (MCX). Margin-based trading is allowed.
■ E-gold: This product has a feature to buy gold in demat form through National Spot Exchange (NSE) in denominations as low as one gm. It has a lower cost, compared with physical gold, and the storage of gold is not required.
■ Gold exchange traded funds (ETF's): One gm of gold is equivalent to one unit of ETF, and these units are backed by physical gold through stock exchanges. It is an ideal option for equity dmat holders with an easy and simple transaction process.
■ Gold fund of funds: With this option, your money can be invested in schemes of mutual funds that invest in gold ETFs.
With this option, systematic plans are also possible which help in averaging gold prices.
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