GOLD INVESTMENT

GOLD is one of the most preferred investments in India. High liquidity& Inflation beating capacity are its strong selling points, not to mention charm, prestige, and so on. Though there are phases when markets witness a fall in gold prices, it won’t last for long, and always makes a strong comeback. This article covers the following:

1. Why Should You Invest in Gold?

Safety, liquidity, and returns are the three criteria most risk-averse investors look for before making any investment. While gold meets the first two criteria without any hiccups, it doesn’t perform poorly at the last one either. Here is why you should invest in gold:

a. Investing in gold is worthwhile because it is an inflation-beating investment. Over time, the return on gold investment has been in line with the rate of inflation.

b. Gold has an inverse relation with equity investments. For example, if the equity markets start going down, gold would perform well. Considering gold as an investment option in your investment portfolio will be a buffer to the overall volatility of your portfolio.

2. How to Invest in Gold?

The ‘golden question’ here is – how does one invest in gold? Traditionally, it was by buying physical gold in the form of coins, bullions, artefacts, or jewellery. However, there are newer forms of gold investments nowadays, such as GOLD ETF (exchange-traded funds) and gold funds.

Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold. Hence, there is no risk of theft/burglary as the gold is stored in ELECTRONIC form. Gold funds involve investing in gold mining companies.

3. What are Gold Funds?

By investing in gold funds, you invest in stocks of companies operating in gold and gold-related activities. Gold mutual funds include silver, platinum, and other metals in their investment basket. A mutual fund manager on behalf of an asset management company manages the gold fund, unlike gold ETFs. They make use of the fundamental trading analysis to buy and sell stocks to maximise returns for investors. Returns from gold funds depend on market conditions to an extent.

Gold mutual funds eliminate the risk of returns considerably by distributing investments over a wide range of investment options. In other words, mutual funds work on the principle of diversifying, i.e. not putting all eggs in one basket. Investors need to weigh their risk appetite and goals before choosing such a mutual fund.

What Determines the Spot Gold Price?

The simplest answer is the law of supply and demand. If buyers are trying to buy gold, sellers may lift prices causing buyers to bid higher. On the other hand, if sellers are overwhelming buyers, those looking to acquire gold may bid lower, thus driving prices down in the process. Of course, spot gold prices can be affected by many inputs that influence the supply/demand equation. The actual spot price of gold is derived from the nearest month gold futures contract with the most volume. This could be the nearest month, or front month, or it could be a month or two out on the time horizon.

What are Some of the Factors That Drive Spot Gold Prices?

Gold is not only bought as an investment, but it is also bought for use in other areas such as industry and jewelry making. The potential influences on the spot price are extensive, but the following list names some of the major ones:

Investment demand
Jewelry demand
Currency fluctuation
Import Duty
Inflation or deflation
Interest rates and/or monetary policy
Risk aversion or appetite
Geopolitics
Equity markets
Government reserves

Gold can potentially see stronger investment demand during periods of economic or geopolitical stress. For example, spot gold may potentially move higher during times of war or geopolitical unrest. From an economic standpoint, gold may potentially see increased buying from a stock market collapse or bear market. Interest rates and monetary policy can also have a significant effect on the spot gold price. Gold may potentially benefit during periods of ultra-low interest rates, as low rates make the opportunity cost of holding gold less. On the other hand, gold may potentially come under pressure as interest rates rise, due to the fact that gold does not offer any dividend or interest for holding it. Currency markets are another major driver of the spot gold price. Although gold is traded all over the globe, it is often denominated in dollars. As the dollar rises, it makes gold relatively more expensive for foreign buyers and may potentially cause declines in the spot price. On the other hand, a weaker dollar may potentially make gold relatively less expensive for foreign investors, and can potentially cause spot gold prices to rise.

What are Gold Futures?

A future, in simple words, refers to a trading scheme in which a commodity is up for trade, with the amount decided presently but a settlement scheduled for a future date, i.e. the agreement is entered into but the gold will be given only on the future date. Gold Futures refers to a deal in which an individual agrees to take delivery of gold at a mutually decided upon date by making an initial payment, with the complete payment to be made as per an agreement. This trade is based on speculation, with an element of risk involved.

Example: Miss Rita has a keen interest in owning gold and decides to invest a portion of her savings in it. She chooses to buy 10 grams of gold from the futures market at an agreed price of Rs 39000 with the delivery scheduled for August, four months from now by paying a margin of 10% ie Rs 3900. The current price of 10 gram gold is Rs 39000 and when she takes delivery of the gold the price is Rs 42000, thereby helping her save Rs 3000 at current rates.

Advantages of investing in Gold Futures

Some of the major advantages of Gold Futures are mentioned below.

It eliminates the need for immediate storage, as a buyer will not have to worry about finding secure storage facilities to store the gold.
Participating in this trade involves lower amounts, as a buyer can pay a certain amount at the time of making a deal and the remaining on signing the agreement.
There is considerable liquidity on offer.
There is a provision to short sell.

Risks associated with Gold Futures

Some of the risks associated with gold futures are mentioned below.

Default risk is a very real phenomenon, which can leave an individual in the lurch during trade.
Gold prices can fluctuate and it is possible for an investor to lose money on his/her investment if prices drop significantly from the time of signing an agreement and taking delivery.
Gold futures can be volatile and there is a chance for markets to crash or go through a phase of instability.

Gold Futures Expiry

An important aspect to consider before opting for Gold Futures is that these are dated instrument which have an expiry date. These commodities stop trading before their agreed upon settlement date is reached. All dealings will be suspended before the settlement date, ensuring individuals have adequate time to figure out their current position

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