Gold – an investment avenue?


The price of the gold in the international as well as the domestic market has been on a northward journey for quite sometime now. Internationally the price of gold has touched a 26 years high of $730 per ounce, and domestically, it is hovering at dizzy heights of about Rs 10,750 per 10 grams. Does this mean that the price of gold is due for correction? Market experts think not. In fact, they foresee the international price of gold touching $1,000 per ounce before the end of the year. Since the domestic price moves in tandem with the international price, the domestic price of gold too will witness a further rise.

Factors Behind The Current Rally:

Rising Demand:

At the international level, a larger number of investors are turning to gold as an investment avenue. The three main reasons behind this are concerns about rising inflation, a weakening US dollar and geopolitical instability. None of these factors look like they will vaporize in the near future. At the domestic level, with the economy enjoying strong growth and incomes on the rise, the demand for gold (which is considered as one of the traditional savings avenue), is likely to continue.

Subdued Supply:

Production of gold cannot be substantially increased, as it is an expensive and lengthy process. Over and above the fresh supplies, there is not much buying and selling of existing gold taking place, since investors are holding onto their gold stocks.

Subsequent Impact:

The simple rules of increasing demand and subdued supply suggest that the price of gold will continue to rise in the future. So it’s not too late for you to benefit from this appreciation in value.

Reading the current Price trend:

Gold has been following a steep upward trend for the past couple of years. When in November 2005 the price touched an 18 years high of $480 an ounce, many market players believed that it would settle down on commencement of the new calendar year. However it went from strength to strength, crossing a 25 years high of $547 an ounce in January this year to reach its recent level of around $730 an ounce, before, correcting to some extent. This correction has been attributed to the annual slack season that gold witnesses in the later summer and monsoon months. During June to August each year, the price of gold usually witnesses a 10-20% drop. Further contributing to the dip in prices has been the partial profit-booking exercise undertaken by a few market players. Yet these factors are short term in nature and the secular long-term trend is still expected to head northwards.

Different ways of investing in Gold:

In the form of Jewellery:

Purchasing gold jewelry has been an age-old tradition in India. One of the greatest advantages associated with it is its liquidity. Gold can be readily bought or sold, in almost any denomination. This cannot be said for most other investments, including stocks of the best performing companies. This is one of the reasons why gold always forms a part of gifts that is given to daughters in India by their parents.

In the form of Coins and bars:

Today, several banks and jewelers sell certified gold coins and bars. This is a convenient form for investors who wish to purchase gold in small quantities as these bars and coins are available in sizes that range from 1 gram to 1 kilogram. To their advantage, these coins and bars carry an international certification which indicates their purity level.

In the form of Gold futures:

When you buy a gold future, the contract entitles you to take delivery of a specified quantity of gold (which is of 99.5% purity) on a prescribed date, at an agreed price. These contracts can be bought and sold via a commodity broker on commodity exchanges such as the Multi Commodity Exchange of India (MCX), The National Commodity and Derivative Exchange (NCDEX) or the National Multi Commodity Exchange of India (NMCE).The contracts are traded on a margin, i.e only a fraction of the value of the contract has to be paid at the time of the purchase of the contract. The balance can be paid when the delivery of gold is undertaken at the time of expiration of the contract. However, the margin needs to be maintained at the pre-specified level at all times. For instance, if the margin payable is 5% of the contract value the market value of the contracts will move in-sync with the domestic price of Gold.

Trading takes place in pre-specified quantities (known as ‘lot sizes’) on the exchanges. In the case of gold, the lot sizes are 100gms, 1kg and 3kg. The contract for these lot sizes expires after 3months, 1 year and 2 ½ months respectively.

On expiry of the contract, the gold will be delivered and transferred to your commodity Demat account. This account helps you to keep track of how much gold you have bought, sold and hold. The physical gold however lies in a vault. As and when you require the physical gold you can collect it from this account by requesting the depository with whom you hold the commodity Demat account to have it re-materialized (i.e . collected from the vault on your behalf).

Though, the contract specifies delivery, you are not bound to hold the contract until its expiry date. If you are not keen to take delivery of gold in its physical form, as and when you feel that the market value of the contract has appreciated adequately, you can sell the contract. On undertaking a sell, you will receive the difference between your purchase price and sale price of the contract and the margin money less brokerage charges.