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Gold ETFs help Portfolio diversification

 


   THE investible potential of gold as an asset class has been a function of jewellery and industrial demand, inflation outlook, strength of the dominant currency, geo-political stability and the gold supply variable. Given the historical and contemporary pervasiveness of gold as a store of value, and to a certain extent, a medium of exchange, gold has adopted a tendency of behaving like a natural currency. Therefore, the investment demand for gold tends to rise in the case of adverse economic conditions, rising inflation, weakening dollar, or general socio-political instability.


   The 15.45% CAGR run-up in gold prices since 2000 was largely attributed to the surfeit liquidity in the early part of the decade, while in the latter half, the turbulent economic conditions, post the sub-prime crisis, contributed to the gold rally. However, despite the teetered recovery in the global economic environment, the optimistic outlook on gold remains unchanged. And here's the reason why.


   Today's geo-political climate has become increasingly volatile, given the ongoing wars in the Middle-east, and the pursuit of nuclear arms by autocratic regimes. This uncertainty has increased further on account of rising tensions in the far-east Asian region.


   Meanwhile, the woes of the global financial economy remain subdued at best. The world's major economies have taken on extensive amounts of debt to keep their economies afloat. To add to that, the economic hardships of Western Europe haven't gone away either. The US economic performance, too, remains modest, with the unemployment situation continuing to worsen.


   Albeit the fear of a double-dip recession in the US and the EU may be unwarranted, yet there is a rising speculation, bordering to near certainty that the Fed-led quantitative easing may be on cards. Consecutively, the key global debt markets continue to remain defensive and maintain a relatively-high risk perception, which in turn, fuels the investment demand for gold.


   Also, traditionally, the gold demand has a seasonal flavour with the intra-year peaking in around November-December. This is attributable to post monsoon festivities in India, corresponding gold inventory expansion by American and European retailers, and the week-long national celebrations in China. Besides, the central banks (bankers) continue to remain net buyers of gold. The interplay of these factors provide a potent case for investment in gold.


   But, from the retail investor point of view, the physical investment in gold has a minor side-effect. Buying physical gold involves the risk of theft, misplacement and potential wrong-pricing. Additionally, when an investor needs to sell his physical gold, again at that point, he/she has to go through the inconvenient route of valuation, bargaining, transaction and delivery.


   All these angles involve risk, skill, and time — making the whole process inconvenient. But thankfully, an alternative method to invest in gold exists. That too without the inconvenience of the physical transaction — that is the Gold Exchange Traded Fund (GETF).


   Gold ETF is nothing but pure gold, traded online through a medium of exchange. Normally, each unit of a gold ETF is worth approximately 1 gram of gold at any point of time. The investors' take-away from GETF is that it allows the investor to invest in gold without bothering for the purity, security or liquidity of gold investment that is attendant with gold hoarding. GETF's online tradability and transactability is exactly like any other stock scrip, making buying and selling an almost intra-day day affair — an idea quite difficult with physical gold.


   In other words, what GETF does is that it gives you the ability to buy, sell, or hold gold at convenience. This idea, though relatively new in India, is quite popular elsewhere in the world. (has caught majorly elsewhere in the world). In India too, with rising awareness, Gold ETF is gaining ground.

 

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