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Should you invest in Gold?

For thousands of years, gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. In Indian context, investment in Gold also has  religious and socio-economic importance. Buying Gold on occasions of Diwali, Akshaya Tritiya or on special events such as marriages and birth of a child is considered auspicious.

As financial markets developed rapidly during the 1980s and 1990s, gold receded into the background and many investors lost touch with this asset of last resort. Recent years have also seen a striking increase in investor interest in gold. While a sustained price rally, underpinned by the fact that demand consistently outstrips supply, is clearly a positive factor in this resurgence, there are many reasons why people and institutions around the world are once again investing in gold.

Market Fundamentals

Gold’s extensive appeal and functionality, including its characteristics as an investment vehicle, are underpinned by the supply and demand dynamics of the gold market.

Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just five countries – India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand.

Significance of Gold Investment in India

Indian gold demand is firmly embedded in cultural and religious traditions. The country has one of the most  deeply religious societies in the world, the most widespread faith being Hinduism, which is practiced by around 80% of the population. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. The goddess Lakshmi, who symbolises fertility, productiveness and prosperity, is said to have been bathed by elephants who carried pure water in golden vessels.

goddess-lakshmi

Hindus consider gold an auspicious metal, which they like to buy or gift during religious festivals. The most important of these is Diwali, which marks the beginning of the Hindu New Year and usually takes place in  October or November.

Akshaya Tritiya, falling on the third day of the bright half of the lunar month of Vaisakha of the traditional Hindu calendar, has also become an important day to buy gold. Purchases on this day are considered auspicious (it is the third most auspicious day in the Hindu calendar).

The association between gold and “auspiciousness” has been used in recent years to promote the idea of buying gold. Over the past five years, Akshaya Tritiya has become a major gold-buying occasion in the South of India, especially in the State of Tamil Nadu, where sales have reached record levels.

To know more read the World Gold Council’s white paper about the role of Gold in India.

Buy Gold as an Investment or Insurance?

Although, without undermining the social and religious reasons for buying Gold, as an investor, you should always know what your objectives are. One of the biggest traps investors fall into is buying a gold position that has little or no relationship to his or her objectives. Gold is not for everyone. Buying gold is usually used as an insurance policy in case other investments such as stocks go down.

Gold is in a bull market right now because its core fundamentals are so outstanding. It is also doing well because the stock market is tanking. You see, that is the “insurance” part of gold. When stocks go down, gold often goes up. A position in gold will often offset your losses in the stock market in troubled times.

The price of gold may jump up to thousands of Rupees per ounce in the current rally or it may struggle and fall lower. No one knows for sure even if they pretend to. One thing is for sure: if the stock market continues to fall, things will look good for the gold investor. Gold is the ultimate alternative investment because it is tangible.

Many people, including the die hard stock investors, often still see gold as the most undervalued asset group in a standard portfolio mix. In general, gold becomes more desirable in times of banking failures and tough economic times. Also, like all investments, gold becomes more attractive to more people the higher it goes. People don’t seem to want to miss out and that is why both gold and stocks tend to go up too high before they fall back.

Before you invest in gold, you should carefully consider what percentage of your overall portfolio you wish to risk in gold-related investments. If you are thinking about investing in gold, it is worth giving the same consideration to your purchase as you would to any other investment. When you buy gold investments, you lower risk in your investment portfolio.

Conclusion

As more investors realize that gold is a great way to profit in today’s uncertain climate, more fund-makers have been happy to supply the means with which to buy gold. There is a whole world of excellent alternatives out there for investors who wish to invest in gold. Some Analysts believe to the extent that Gold prices will quadruple by 2010!!! Just be sure you understand what your gold objectives are before you allocate too much of your portfolio towards it. Gold can be a great addition to any portfolio but only in the right amounts.

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Manish Misra
Manish is an Internet Professional and is currently employed with India's leading internet portal. He has versatile experience spanning across internet, e-business and retail financial services domains.

He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com

Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.

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3 thoughts on “Should you invest in Gold?

  1. I have a practice of buying 1 gm gold in each month from 2002. I believe this is one of my best and successful practice to get invested with gold. This is a classy article but less found by people. True treasures always difficult to fine. It is a true blog but less people find the value. Appreciated. Go ahead.

    1. Thanks Sherin!

      Nice SIP method of buying Gold! Come to think of it, advantages of SIP can be applied to any Financial as well as non-financial investments that we make. Interesting!

  2. Yes,without undermining the social and religious reasons for buying Gold, as an investor, you should always know what your objectives are.Thanks for the great reading, we buy Gold Bullion in a recession. I will pass this on to our Ira clients to read.

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