Why invest in Gold ?

Pravin and his wife Sudha are debating over the last one week whether they should buy token gold ornament this Diwali or they should invest in gold. They approached a Financial Planner and sought his advice. The Financial Planner enquired about their goal and ascertained that they want to save for the marriage of their daughter, Mitali who is 6 years old now. He analysed the asset allocation and found that percentage of gold is very low in their portfolio and recommended that they should hold at least 10% gold in their portfolio. On being asked about the reasons for investing in Gold, the Fee Only Certified Financial Planner reasoned the following factors favoring investing in gold for long-term.

 1. Global economic uncertainties: Many major economies of the world are passing through a difficult time after the 2008 Economic crisis. Despite serious efforts being made by the USA, the unemployment rate is yet to show any improvement. Some countries in the European Union especially Greece are having serious problems due to external debt. The situation in Italy, Spain, Portugal and Ireland is worrisome. France is on the verge down gradation in rating. The economic uncertainties have affected confidence of the investors in the equity markets. The safer bet is investing in gold.

 2. Negative Real Interest Rates: The inflation rate in all ruling very high and food inflation has touched double digits again. The reserve Bank of India has increased interest rate 12 times in the last 18 months to control inflation. The interest rate in banks deposits have been hiked by many banks but are lower than the rate of inflation. Further interest rate of PPF and postal deposits like NSC etc are much lower than the rate of inflation. Negative real interest rates of savers are a big worry. Globally there has been a very strong historical relationship between negative real interest rates and stronger gold prices. India is no exception and has prompted increase in demand for gold.

 3. Fiscal deficit: The unprecedented best burden of many countries have brought the risk of combating inflation by increasing money supply through printing of currency notes and borrowing from the market .This will aggravate fiscal deficit situation. The money supply in the economies will increase and currency will lose value. This situation is very gold friendly.

 4.  Growing Gap between supply of Gold from Mines and Demand for gold: Globally mined gold is roughly 2,500 tons per year. Traditional demand for gold for making  jewellery and other uses has exceeded this by a considerable margin .This gap has been met primarily by leasing mechanism  of gold held by the central Banks. But it can not permanently meet this deficit. Further supply from mines will decline and will contract due to natural exhaustion of existing mines. This will lead to increase in prices of gold.

 5. Weakening of US Dollar: Since US Dollar is weakening against all the major currencies, many Central Banks who have accumulated enormous quantities of U.S. Dollars are rumored to be buyers of gold to diversify away from the U.S. Dollar.

 6. Increasing popularity of Gold: Gold is seen in a more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tons in the next few years.

 7. Rising  geopolitical  tensions :The continuing turmoil in the Middle East countries, the war in Afghanistan, the nuclear ambitions of North Korea and the growing conflict between the U.S. and China due to China's refusal to allow its currency to appreciate against the U.S. dollar could explode anytime. A fearful public has a tendency to gravitate towards gold.

 8. Emergence of E Gold: Investing in physical gold has risks of purity, safety and liquidity. The goldornamentsare also costlier due to inclusion of making charges and has risk of storage. From tax point of view,e gold has advantages over physical gold. For getting long term capital gain tax benefits, physical gold has to be held for 3 years and above is a vis 1 year for e gold. Similarly wealth tax is payable for physical gold. But for holding e gold through Gold ETF, one need to have a Demat account But in case Demat accounts are not there, e gold can be bought through Mutual Funds.

 Investing in Gold through E gold is very convenient. You may consult a SEBI registered investment adviser for a proper guidance.

Last modified on Sunday, 01 September 2013 13:07

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

4 comments

  • home Air conditioners

    posted by home Air conditioners

    Monday, 09 September 2013 02:40

    Excellent website you have here but I was wanting to know if you knew of any forums that
    cover the same topics talked about in this article?
    I'd really like to be a part of community where I can get feed-back
    from other experienced individuals that share the same interest.
    If you have any recommendations, please let me know.
    Thanks a lot!

    Report
  • Sweta

    posted by Sweta

    Monday, 03 June 2013 03:12

    Nice one.

    Report
  • Rohan

    posted by Rohan

    Monday, 03 June 2013 03:11

    Thanks Prakash to put it in a concise manner!

    Report
  • Sudha

    posted by Sudha

    Monday, 03 June 2013 03:10

    Quite informative!

    Report

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