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Thursday, August 29, 2013

Why Gold is almost always a good investment

Traditionally, Gold has always been considered a safe bet and a great option to rely on, in case of financial crisis. However, can it also be considered a good investment option ie can it give you a combination of safety and returns better than most other investment and options that you are aware of? Lets read on.

Off late, Gold has fluctuated a lot. We have seen around 35% fluctuation in the Gold prices in the last 6 months globally, and if you specifically talk of India, it has been even more (around 50%) because of various other domestic factors which got superimposed over the global factors.

Gold in ETF (exchange traded fund) form is always a safe bet, and also capable of giving handsome returns if you understand how gold prices fluctuate in the market. Let us understand a few factors influencing Gold prices:

1) International Gold price
The international price of Gold has bounced back from $ 1200 per ounce to $ 1360 per ounce in the last 2 months. This is primarily because lot of demand came in at $ 1200 per ounce. The reason for such demand was that the all inclusive average cost of Gold production now a days is close to $ 1200. Whenever the market approaches a level close to the cost of production, prices can rarely fall further because the producers would start reducing the supply, and therefore, Demand Supply would balance it out. This also makes Gold a much safer bet vis a vis equity based investments like stocks and mutual funds. While a stock (or a Mutual Fund) can go down to any value depending upon the company's earning potential, Gold will more likely hold on to its minimum production cost.

2) Currency Fluctuations / Other local factors
Recently, the rupee has depreciated sharply vis-a-vis the dollar. Whenever the rupee falls, the gold becomes costlier for Indian buyers since most of the Gold is imported in our country. In fact, India is the largest importer of Gold in the world.

Other than currency, there could be other local factors influencing Gold prices in a specific country. e.g. in India, the import duty on Gold was increased from 8% to 10% (to control imports and improve Current Account Deficit - CAD), thus making the Gold costlier for Indians.

3) Global Economy
Gold and Global economy usually go against each other. If people tend to lose confidence in the global economy, they tend to opt for a safe hedge like Gold. The vice versa is also equally true. Off late, there was a dilution in US Fed stand to taper the Quantitative easing, thus surprising optimists of a global economy fight back, and hence international gold prices went up.

Long term outlook is strong
Gold has fallen from this years peak of $ 1700 per ounce to $ 1200 per ounce and then recovered to $ 1360 per ounce now. Considering the long term uncertainty in global economy, outlook for Gold is still positive and strong.

What should you do?
I have been advising the readers of my book (From the Rat Race to Financial Freedom) that around 10% of your portfolio must be in Gold ETFs. It will always continue to give you safe returns whenever the economy lacks confidence and also has a minimum support base, and will therefore is never likely go below that certain minimum value. Therefore, it is an ideal investment option which offers a great combination of safety and returns. It is also an excellent bet against inflation because the minimum cost of producing Gold keeps adjusting itself to the global inflation levels.


Cheers




Manoj Arora
Lead a Financially Free Life !!

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