The prices of precious metals have corrected by over the last few days. The price correction is mainly due to profit booking in precious metals by large investors after the easing of sovereign debt crisis in the European markets, and better macroeconomic numbers from US with respect to pick-up in home sales and reduced unemployment benefits claims.
Investments in precious metals based instruments have yielded attractive returns over the last few years due to the slowdown and uncertainties in the global markets. The outlook of precious metals is still quite good but its sheen may go down as global economies continue to recover, going forward.
Investors looking at diversifying their portfolios from pure equity or pure debt-based investment instruments can look at investing in precious metals, especially gold. However, investors should be cautious and avoid going overboard towards investments in gold. The prices of precious metals are expected to have higher volatility this year. The global economies are looking at consolidating their recovery this year, with phases of higher uncertainty in terms of the sovereign crisis in Europe, high rate of unemployment in US and increasing inflation in the emerging markets. These nervous spells in the markets will drive up the prices of precious metals.
On the other hand, there is a lot of underlying demand for precious metals at lower price levels. This will restrict the downside correction in the prices. The potential and investment options have reduced in the domestic stock markets due to the tighter monetary policy and stretched valuations. Therefore, investors can look at investing in precious metals to diversify their portfolio.
Among precious metals, gold is more stable due to the availability of many investment options.
These are some of the investment instruments you can consider to invest in gold:
Gold bars and coins
Buying physical gold is the traditional method of investing in gold. It can be done by buying gold bars and coins from authorised outlets. Many banks and authorised dealers sell gold coins and bars which are of standard quality and therefore can be liquidated anywhere in the world.
Investing in physical gold and silver is preferred by investors in smaller towns where it is difficult to manage and maintain exchange-traded fund (ETF) accounts.
It is important for investors to understand and differentiate between investment and consumption when it comes to buying gold or silver. The purchase of gold or silver ornaments is consumption and is not the same as investing. Ornamental gold includes a certain percentage of impurity and therefore fetches lower returns at the time of liquidation. Also, the price includes making charges which does not have any returns.
Exchange-traded fund
Gold ETFs are like mutual funds with gold as their underlying investment asset. ETFs make it easy to invest in gold in comparison to buying physical gold. For example, investments in and liquidation of ETFs can be done through the Internet. There are no issues of ensuring purity of the gold. ETF units can be held in a demat account.
The minimum investment requirement in gold ETFs is also very low as investors can buy in multiples of half a gram or one gram.
