Skip to main content

Why the World Looks Up To Gold

Here are some very sound reasons as to why you should adorn at least a part of your portfolio with the yellow metal


   GOLD is on a roll. The yellow metal has given a whopping return of 47.7% over the past two years in dollar terms. It currently quotes at a price of around $1,350 per ounce (1 troy ounce = 31.1 grams). However, in rupee terms the gains have been a little lesser at around 40.7% during the same period. The price of gold in India is currently around 19,950 per 10 grams.


   So why are the returns different in rupee terms? Like most other commodities, gold is priced in US dollars in the international market. And the US dollar has been losing value against other currencies, including the Indian rupee. The rupee has appreciated by around 6.2% over the past two years, and currently quotes at around 45.6 against 48.6 two years ago. This has limited the returns in rupee terms. Let us understand this phenomenon through a simple example. Let us say at a certain point of time gold is at $1,000 per ounce. A year later, it is
at $1,200. The return in dollar terms is 20%.


   Now, let us say one dollar was worth 50 initially. So, at that point of time in rupee terms, one ounce of gold was worth 50,000 (1,000 x 50). A year later, one dollar is worth 48. At that point of time, one ounce of gold will be worth 57,600 (1,200 x 48). This would mean a gain of 7,600 (57,600–50,000) or a gain of 15.2% (7,600 expressed as a percentage of 50,000). So even though return in dollar terms is at 20%, the return in rupee terms is rather limited at 15.2%. Of course, an appreciating rupee will limit gold returns, but that does not mean that gold is not a good investment bet.

The Twain Don't Meet:

The price of gold and the US dollar are inversely related. When investors start losing faith in the US dollar, as they have over the past few years, they start bidding up the price of gold. And when the world views the dollar as a stable currency, as it has all these years, the price of gold doesn't go anywhere. But lately that has not been the case. The Federal Reserve (the Fed), the central bank of the United States, has been printing dollars big time to get the US economy, up and running again. Since the start of the financial crisis, the Fed has printed nearly $2.3 trillion (1,04,88,000 crore at the current ex-change rates) to revive the US economy. The idea was and is that with more money in the financial system, banks will lend more. The increased lending will help people buy more goods and services which, in turn, will benefit companies and thus generate more employment and hence more consumption. What sounded perfect theoretically hasn't really worked out primarily because banks haven't been lending.


   However, when anything is suddenly available in excess quantity, it tends to lose value. So, if the US government prints dollars, as it has in the recent past, the dollar will lose value against other currencies. This, in turn, means that other currencies will appreciate or gain value against the dollar, as the Indian rupee has over the past two years.

Competitive Money Printing:

An appreciating currency hits exports and exporters. Currently, one dollar is worth around 45.6. So an exporter exporting products worth a million dollars makes around 4.56 crore. If the rupee increases in value against the dollar and one dollar is worth 44, the exporter will make only 4.4 crore or 16 lakh lesser. Several countries make a lot of money by exporting raw materials and finished products to the US. And they do not want to lose out on their competitive edge. So, they have started printing money to ensure that their currencies do not lose value against the dollar.


   As Central bankers in Brazil, China, Chile, Japan, Russia, South Korea, and Thailand, have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US-dollar versus their own currencies.

The Impact On Gold:

As more and more currency across the world is printed, all the smart investors will head towards gold, driving up prices of the yellow metal. The biggest beneficiary of the growing currency trade wars is the precious metals — gold and silver — basking in the growing supply of freshly-printed paper currency worldwide. It also does not help that a lot of countries like Japan are printing money to tide over their fiscal deficit. The Bank of Japan, the central bank of Japan, is printing money to finance half of the annual fiscal deficit of around 44 trillion yen this financial year.


   All this of course does not augur well for paper currencies around the world. In this economic environment, there is one currency which is of immense intrinsic value and is also limited in terms of supply, and that is gold. Gold is now a default currency as no one wants to hold any currency. To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends.

Is A Temporary Correction Due?:

Gold prices have run up to never before seen levels, due to the competitive money printing that is happening all across the world. But is it in the bubble territory as yet? Bill Bonner, founder president of Agora Publishing and director www.equitymaster.com says, It's not in a bubble. It is in a little peak. I wouldn't be surprised to see a sell-off. It did that in the '70s, when the bull market went from $41 to $850 per ounce. But in 1974, right in the middle of it, there was a counter trend and gold fell 50


   He feels that the price of gold is overdone and is ready to correct all the way down to $1,200 per ounce. But prices will continue to go up. Even though Rosenberg feels that gold prices are due for a correction in the near term, he has for long maintained that the price of gold is likely to touch $3,000 per ounce. He stills stands by that view. We see gold at around $2,000 per ounce (around . 30,000 per 10 grams) in another couple of years.

Should You Still Be Buying Gold?

: Investment experts believe that every individual should have 5-10% of his or her total portfolio in gold, as it is the best hedge against the vagaries of global recession or depreciation in the US dollar. At all times, and especially in the current environment, gold should always form a part of any investor's portfolio.


   As William Bonner & Addison Wiggin write in the 'Empire of Debt — The Rise of an Epic Financial Crisis': There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.

 

Ø       An Indian investor can make money from gold in the following four situations:

Ø       The price of gold in dollar terms goes up. The rupee also depreciates against the dollar. This is the best case scenario, but highly unlikely

Ø       The price of gold in dollar terms goes up. The rupee continues quoting at the same rate to the dollar as it is right now

Ø       The price of gold in dollar terms goes up. The rupee appreciates against the dollar, but it doesn't appreciate enough to knock off the gain in dollar terms

Ø       The price of gold in dollar terms falls. The rupee depreciates against the dollar so as to knock off the fall in price in dollar terms

 

 

 

Popular posts from this blog

Post Office Deposits Interest Rates

Best SIP Funds to Invest Online   SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further information on Top SIP Mutual Funds contact  Save Tax Get Rich on 94 8300 8300 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com

LIC Leave Encashment Plan

LIC Leave Encashment Plan       Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a missed Call on 94 8300 8300 --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms fro

Tax Slabs 2012

Slab 1 Upto Rs 1.6 Lacs Tax Rate NIL for Men; Upto Rs 1.9 Lacs Tax Rate NIL for Women; Upto Rs 2.4 Lacs Tax Rate NIL for Senior Citizen; Slab 2 Rs 1.6 Lacs to Rs 5 Lacs Tax Rate 10% Slab 3 Rs 5 Lacs to Rs 8 Lacs Tax Rate 20% Slab 4 Rs 8 Lacs onwards Tax Rate 30%   --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.   Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)   Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications   These Application Forms can be used for buying regular mutual funds also   Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) HDFC TaxSaver ICICI Prudential Tax Plan DSP BlackRock Tax Saver Fund Birla Sun Life Tax Relief '96 R

How Tax Deducted at Source (TDS) works?

    THE tax season is here. And if you are an employee you can't blame your employer for deducting large chunks of money from your salary towards tax deducted at source ( TDS ), which he is legally obliged to do. Your bank will also deduct some percentage from your FD interest of Rs 10,000 or more towards TDS! So what is this TDS all about? How is it computed? Are there any changes this year? Read on... What is TDS? TDS reduces your taxable income and could even provide tax relief! The TDS collections account for 40 percent of the total taxes collected in the country. As the name suggests TDS is the amount of tax that is deducted at source in certain types of income . The TDS thus collected is deposited in the Government treasury within a specified time. How is it computed? Some of the types of income where TDS is applicable include salary, interest, rental fee, interest on securities, insurance commission, dividends from shares and UTI/Mutual Funds, commission and brokerage

What is price deflator?

What is price deflator? A defaltor is used to restate data measured over time to prices prevailing at a particular period or time to make it comparable. Essentially, a deflator removes the effect of inflation from the data. What is the role of price deflator in GDP calculations? Prices are continuously in a state of flux, but generally trend upwards over time. Therefore, even without an increase in the quantity of goods and services produced by an economy, price increase can give the impression of an increase in the gross domestic product, or GDP, the benchmark indicator of economic activity. Therefore, the impact of prices has to be removed at arrive at a true measure of the value of goods and services produced, or real economic growth. A deflator is used to reduce output estimates at current prices to what they would be if calculated with reference to prices in a particular year. Why is GDP deflator considered a good measure of inflation? The ratio between the GDP at current p
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now