Gold is Gold

chillibreeze writer — Rashmi Ponkshe

Gold and Silver in India

Of all the precious metals, gold is the most popular metal. It is used for both investment and consumption purposes worldwide. Gold, besides having an ornamental value, is a great investment option. Like all other goods, the price of gold is determined by supply and demand; however, factors like hoarding and distribution play a greater role since the production of gold is not scarce like most other goods.

Statistics reveal that by the end of 2006 the total gold mined was about 158,000 tonnes. Out of the total production of gold, 80% goes into the production of jewelry and other industrial uses while the remaining 20% goes to retail investors and the ETFs.

India is the largest consumer of gold among all other countries in the world with a demand of about 500 tonnes for the last one year, demand that is driven by consumption as well as investment. India alone accounts for 14% of the total consumption of gold, yet does not significantly control its price.

The price of gold is benchmarked against the London bullion markets. The price of gold is hovering around 19,000 per 10 gm currently and it has been increasing for the past few years. In recessionary times, when equity markets crash and other forms of investment fail to give returns, gold becomes the most attractive investment option. In inflationary periods, gold acts as a hedge against inflation. When prices increase, investors can liquidate their gold assets and investments for higher cash, which would increase their purchasing power.

An inverse co-relation between the sensex and gold prices is illustrated in the diagram below. The price of gold given is per 10gm of gold. The diagram shows that the slightest fall in the sensex boosts demand for gold pushing up its price. The Sensex and gold price movements were observed for the months of July and August 2009.

Rashmi Ponkshe

There are various factors that are responsible for the current economic crisis leading to the equity market crash. The Euro debt crisis, Hungary’s joining the Euro debtors list, the rift between the two Koreas, the new norms on 15% dilution of private equity for listed companies; FIIs taking the sell-off route are some of the causes. In such a scenario, gold has become very popular since it does not have a direct co-relation with other assets. Its price thus remains unaffected. As demand for gold increases, its price increases thus reducing demand for consumption purposes but at the same time giving high returns to gold investors.

In India, apart from consumption for matrimonial purposes, the demand for gold for investment purposes has been rising steadily. The World Gold Council estimates suggest that it shot up by 248% on a yearly basis during the first quarter of 2009.

Various forms of gold investments in India are explained below:

Gold in real form: It is always wiser to store gold in form of coins or biscuits rather than pure gold for safety reasons. But this form of gold has lesser value due to limited acceptability.

Gold in electronic form: Investments in gold can be made in electronic form or on paper through the demat route where storage risks are minimal.

Gold ETFs: These are exchange traded funds where units (NAV) are linked to the price of gold. So, when gold prices move up, the NAV follows suit. Each unit of an ETF equals 1 gm of gold. ETFs were launched in India in 2007. They are secure instruments of investment that are backed by gold. Currently, a number of AMCs offer gold ETF products.

Gold Mining Companies: It is an indirect form of investment in gold through stocks and shares of gold mining companies. The value of shares would depend upon the price of gold.

Gold Futures: These are very risky instruments of investment. Costs of storing are minimized. Investors need lesser money to invest in large proportions but retail investors are not recommended to invest in such products.

Gold bullion: People with a huge corpus of funds should go in for such investments. Gold bullion or bars can be traded on commodity exchanges like the NCDEX and MCX. Gold is traded at a value higher than the market price but the cost of storage involved is much higher.

Pricing of Gold in India:

Though India’s consumption of gold is the highest in the world, it has no control over pricing. Though RBI plays a great role in price determination, many are of the view that its policies are conservative. India still follows prices in London, since imports of gold take place at the London prices. Others are of the opinion that traders and buyers take into account international configurations thus accepting international prices. The irony here is in the statistics. Though demand for gold fell by about 33% in 2009, average prices rose by about 12% to USD 972.35 per ounce during this period. In economic terms, the demand for gold is thus said to be inelastic to other factors. So we can conclude that gold retains its value at all times making it an evergreen investment avenue for all.

Sources:

http://www.rupeetalk.com/case-study/investment-case-studies/how-to-invest-in-gold/

http://www.scribd.com/doc/29500428/Co-relation-between-Sensex-and-Gold-Price

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Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in July, 2010. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.

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—About our writer:

Rashmi Ponkshe has an MA degree in Economics from the University of Pune. She worked as a Research Analyst with a market research and content management firm for three years, dealing with research projects in industries like banking, finance, BPO, ITES, IT, telecom etc. She was also instrumental in creating a mutual funds section for the company website. Rashmi has also undertaken freelance writing projects with a number of content management firms.

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