for NDTVProfit.com
Thursday, May 29, 2008 (New Delhi)
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Gold prices have been on an uptrend for the last several years, with heightened price activity in the past six months. The question on everyone’s mind is, what is the best way to profit from rising prices?
There are several reasons why gold has been a favoured investment for the last 5,000 years of recorded history. It has traditionally been held as reserve by some of the largest central banks in the world. The price of gold, like the price of all commodities, is driven by supply and demand. Gold is regarded as an alternative safe haven to the US Dollar and is also considered a hedge against oil-led inflation.
Gold has served multiple functions and met different purposes since time immemorial. It has been the basis for monetary systems, used as jewellery, as an investment, as a financial safety backup as well as for industrial and medical uses because of its physical properties. It has always been a favourite of the commodity markets worldwide. It is a truly international commodity—the largest future markets are in the US; the physical capital of gold is Europe; the largest producer is Africa; and the largest consumer is Asia. Gold is considered to be a safe haven worldwide, with a historical trend indicating that investors turn to the precious metal in times of inflation and instability. Buyers also invest to meet social compulsions and also for true portfolio diversification.
Though it is nobody’s case that gold prices will continue rising for ever, there is an uptrend currently which has seen some of the most prominent funds in the world investing in gold. In fact, for five years on the trot, the high for gold in any year has been the low for the succeeding year.
Large allocations to investment in gold have also helped drive up prices. Gold markets are highly liquid and gold is the preferred commodity traded worldwide. Of course, everybody’s requirement, risk appetite and cash-in-hand situation is different and a single trading or investment solution will not be suitable for all.
On the investment front, it may be a good idea to take a long term view. There are various avenues to invest in gold—and profit if the prices go up.
1. Delivery from commodity exchange: In many ways, the ideal place to buy physical gold is through the commodity exchanges like MCX and NCDEX via your broker. Exchange-traded gold is highly standardized and confirms to international specifications. Besides, delivery can be taken in physical form or in demat form.
2. Exchange-traded futures: If you have a price view, you can take a “position” in the commodity futures markets in lots of 100 gm and 1 kg by simply giving exchange-specified margins, which are typically between 4% to 7%.
3. Exchange-traded funds: These funds are listed on equity exchanges like NSE and BSE and are traded exactly like shares. They form an ideal investment vehicle for those wanting to take positions in small amounts. However, trading liquidity is not high in India so far for this product.
4. City’s gold market: You can also choose to invest in bars bought physically from the neighbourhood jeweler, but if bars have to be bought, the commodity exchanges may still be the best places to buy them from.
5. Coins: These are generally priced higher and are more popular as gifts and mementoes rather than as investments.
6. Jewellery: Since making charges are a significant percentage of the total cost, gold jewellery is not truly an investment but more of an fulfillment of a social need.
Commodity exchange brokers are similar to stock and share brokers and typically your share broker too will give you the opportunity to trade and invest in gold through national commodity exchanges like MCX and NCDEX. Research desks give continuous guidance on market movements enabling you make an informed decision.
All branches of most national-level financial intermediaries are equipped with commodity trading and usually your existing Relationship Managers can help enable your commodity trading accounts.
Gold futures trading on commodity exchanges is a very attractive product for traders and jobbers with low exchange-specified margins and international price benchmarking. There are several strategies available for trading in gold which research desks equip clients with.
Some large broking companies have also come out with special reports on gold which educate the consumer about price outlook scenarios, so do ask your broker for it because they will help you in making the right trading and investment decisions. Due to the very nature of futures trading, it gives you the opportunity to profit from a fall in gold prices as well if you can correctly anticipate the price movement. Major TV channels too continually flash gold prices and cover reasons for significant price changes daily.
Whether you decide to trade in futures or invest in physical or demat gold, you should look to invest between 5% and 10% of your investible surplus in the metal. As far as investing in gold is concerned, the trick is to buy now, keep a sharp eye on price movements and exit when the time is right.
Besides, Akshay Tritiya has become a national festival like Dussehra and Diwali and it is widely believed that anything done on this day will grow. So people start new ventures and buy gold on this auspicious day, even wear new gold jewellery on the day for year-long prosperity. After all, “Akshay” means “which never diminishes”. Overall, the demand for buying physical gold is growing stronger and is a reflection of the strong demand from the great Indian middleclass.
So go for gold, because all that glitters “is” gold.
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