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Friday, April 22, 2011

Investment in Gold


There is an old maxim in Sanskrit (an old Indian language) that has become an axiom these days -“सर्वे गुणाः काञ्चनमाश्रयन्ति ” means all virtue lies in the beholder of the gold.
With increasing inflation and debasement of world currencies gold prices are rising exponentially.
Recently, when standard and Poor’s lowered US credit rating outlook due to widening deficit, resulted in  weaker dollar, which bears the inverse relationship with gold.
US treasury department projects that government could reach debt limit ceiling of $14.3 trillion by mid may,  and such a huge borrowing requires debasement of the local currency.
Debt concerns in USA and Europe are boosting gold prices as gold is used as the currency alternative.
Whenever there is tensed geo-political situation or hyper inflation, investors seek refuge in gold as it’s the best hedge.
Gold Facts:
(1)Annual world gold demand is about 4000 tonnes.
(2)Jewellery accounts for largest demand about 2200 tonnes.
(3)Overall industry demand including dental industry is about 450 tonnes.
(4)ETF and other funds with gold as underlying, accounts for around 350 tonnes .
(5)Gold mine production  is declining day by day and was never more than 3600 tonnes since 1981.
(6) No significant success in finding new mines.

How an investor could start investing in gold
(1)Physical gold: Traditional way to invest in gold was buying gold jewellery but it involves labour cost and the purity of the jewellery is often questionable.
Though gold coins sold by banks are pure but banks don’t buyback these coins. One has to go to goldsmith’s shop to liquidate these coins.
Besides this storage of physical has its own risks like larceny, robbery etc.
(2)Gold future: It’s not an investment as one has to rollover his positions each month, besides this future contracts' have high cost of carry .
(3)Gold ETF: Gold ETF’s are mutual fund scheme that are listed and traded on exchanges like stocks.
(4) E-gold from  National Spot Exchange  Limited(NSEL): NSEL is the national level institutionalized, electronic spot market. It is more beneficil for active and large  traders/investors and here physical delivery of gold could also be taken.

Transactions costs are lower than Gold ETFs and it requires registering as client with any members of NSEL and opening demat account with any DP(Depository Participant) empanelled with NSEL.Thereafter client can trade online or offline.


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