The Bullion Bull!

IIPM Ranked No. 1 B-School In Global Exposre - Zee...

The market dynamics and the love for Gold indicate that the golden days are here to stay...

You can blame it on the geo-political turmoil, struggling dollar, soaring global crude prices, concerns over the US recession, Fed rate cuts, troublesome inflation, global economic woes et al but the ‘historical anomaly’ of surging gold prices has definitely made a comeback. While the choppy ride at the bourses saw investors suffer some great loses last week, gold prices were busy hovering over $1,000 an ounce (before sliding down this week). Given the fact that the equity markets are underperforming, bonds and fixed deposits are giving negative returns (taking inflation into account) an investor is bound to head to safer havens. What else than gold could find a resting abode to those wary band of investors?! Swapnil Pawar (Director, Park Financial Advisors) avers, “Gold is a very good investment option now. It is considered a safe haven in times of crises like now. It is a better store of value than any specific currency and even debt instruments.” Sounds logical, as the class of investment has bucked the trend of seasonal variations and has outperformed peers. And if there is a further slump in the stock prices it could probably take profit booking in gold to next levels.

“Gold can always form a part of one’s investment allocation. This is because gold historically has been seen to have negative co-relations with other asset classes like equity and even the US dollar. So typically if equities go down, gold could go up and hence if your investment basket is diversified and includes gold, your downside will be protected,” Krishnan Sitaraman, Head, Fund Services & Fixed Income Research, CRISIL, futher supports the reason. But with the bullion prices scorching at record highs and the purchases of the yellow metal apparently drying up is it still a viable option? “Gold is due for some short term correction. We see gold correcting to levels of $875-850 by May, 2008, which are very attractive levels to go long. By July ‘08 one can see a bounce back in the prices of gold and by year end gold is expected to trade at $1,200 levels,” avers Pritam Patnaik, Associate V P, Kotak Commodities. “Though it’s difficult to predict but another 10-15% increase in dollar terms is not ruled out,” adds Swapnil. And in this scenario, gold exchange traded fund (GETF) also called ‘paper gold’ seems to be an attractive investment option.

GETFs listed on the stock exchanges offers the investors’ exposure in the underlying commodity without taking the physical delivery. Add to it the fact that ETFs do not feel the pinch of the tanking markets as they are not benchmarked against the equity market index. To put things into perspective; while the Sensex has lost more than 27% in the last three month, Benchmark AMC (the first one to launch GETF) have given a return of 36% (compound annualised)and over 28% in the last three months.

Moreover, there are several other reasons as to why gold should form an integral part of one’s portfolio (be it in the physical form or the dematerialised form); the first and foremost being the ease of trade, an investor can take the advantage of the soaring gold prices through a demat account without bothering about the nuances of transportation, security, purity, insurance et al. Well, the added benefit in the form of tax advantage (no wealth tax, no securities transaction tax) and the ease of purchasing (of course selling as well) in small denominations are always there to make the deal all the more lucrative.

Gyanendra Kashyap

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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