Gold as an investment avenue has been in the news in the last few years because of the turbulence in the global economy. The price of gold is at an all-time high of Rs 19,000 per 10 gm. Historically, gold has been a haven for riskaverse investors and therefore, the price of gold rises sharply during a financial crisis when investors turn risk-averse.
This has been happening over the last couple of years. The confidence and interest investors have in gold has gone up as both the US and European regions are going through financial uncertainty.
These are some of the main factors that pushed gold prices in the last few months:
Speculation
This is the prime driver of gold prices. Analysts believe investor confidence remained firm in gold during the recession, and this pushed it to higher levels. The price of gold eased a bit during the second half of last year as the recession started easing, but it bounced back sharply driven by the financial crisis in the Euro region. Analysts believe fresh money has been pumped into gold based instruments by large institutional investors who have increased their portfolio allocation towards gold as a process of lowering risk in their portfolios.
The demand for gold has increased over the past few years. In addition to individual investors, many large fund houses, and even some countries' central banks, are looking at buying gold as part of their strategies to reduce risk.
Currency depreciation
This is another reason why the gold price went up in the European and Asian markets, including India. The price of gold recorded new highs in Euros, British pounds and Canadian dollars due to a sharp appreciation of the US dollar against these currencies over the last few months.
Investors consider gold an international currency accepted everywhere, without it having a direct relation with any country's economic condition. Many large investors here consider gold safer than cash in the current economic situation.
Diversification avenue
Analysts recommend gold and gold-based investment instruments as a good investment option for investors looking at diversifying their portfolio from pure equity. The returns from gold-based instruments have been quite attractive in the recent past.
However, the price of gold has already gone up quite significantly and therefore long-term investors should invest at dips during the correction phases.
These are some of the investment instruments you can consider, to invest in gold:
Exchange-traded fund
A gold exchange-traded fund (ETF) is like a mutual fund whose value depends on the price of gold. Usually, each unit of gold ETF represent one gram or 0.5 gram of gold as an underlying asset. The units of gold ETFs have to be purchased or sold on the stock markets and not from or to a mutual fund house.
To invest in gold ETFs, you need a demat and brokerage trading accounts. Purchased units of ETFs come to your demat account similar to any stock. In India, the gold ETFs are traded on the National Stock Exchange (NSE).
Gold bars and coins
Investing in gold bars and coins is far more easy now-a-days. Many banks and authorised dealers sell gold coins and bars that are of standard quality. Investors should look for exit options before investing in gold coins or bars. Gold coins purchased from banks or financial institutions come with liquidity issues as banks do not provide a buyback option.
It is important to understand that investments in ornaments are not the same as investing in gold. Ornaments have sentimental attachments and therefore are not easy to liquidate. Also, at the time of liquidation, the making charges are a loss.
