Huge chests of gold are found in Sri Padmanabhaswamy temple’s hidden treasures in Kerala. Terrorists strike through the heart of India’s gold trade in Zaveri Bazaar in Mumbai. Satya Sai Baba’s cupboards seem unlikely to stop oozing out jewelry and gold articles anytime soon. It’s raining gold in the news these days. Despite being in news a lot in recent days, the reports of gold prices touching a record high of Rs. 23,470 per 10 gm deserves separate mentions of their own in the newspaper headlines.
So does this mean that during the times of a weakening US, a Europe struggling with debt issues and our own inflation compounded problems, gold is one simple safe and traditional option of preserving our wealth in the volatile market? (Other than, of course stuffing our cushions and mattresses with currency)
If a recent study by Reuter’s commodities analyst Wang Tao, based on Wave Elliot Theory and Fibonacci Ratio Analysis, is to be believed, then gold might touch Rs. 30,000 within two years. Although Wang attributes this spurt in gold chiefly to group psychology among other factors, but these “other” factors too come together strongly to fuel this rally and are equally important in establishing gold as a genuine investment alternative.
As the economic data in US continues being weak, the central banks across the world have started fearing the unthinkable, that US may lose its AAA rating and thus have started selling US Dollars and are replacing it with ever so reliable Gold. Banks in Asia have done so and so have Russia and Mexico. Thereby fuelling the global demand for gold and sending its price on a skyward trip. And that’s not all, even currencies like the Norwegian krone, Singapore dollar, Australian dollar and Swiss franc are likely to outperform the debt saturated U.S. dollar, the British pound and the euro thus further adding to the demand for gold among the Central Banks.
Combined with the impeding Hindu Festive season and Wedding season the domestic demand for gold has only one way to go – up. Riddled with the inflationary pressures, more and more Indians have already started approaching gold as an effective hedging option. Have cash, Will Buy – is their mantra, as gold based funds gain popularity by the minute and the acceptance of gold as a financial asset rather than something you keep in a locker at home gains ground.
Gold provides a number of advantages when it comes to investments over other options. Least of them being the extreme liquidity it provides. When compared to real estate, the other relatively safe bet, gold is hassle free in terms of legal requirements accompanying a deal. And with the gold fund accounts the need of physical storage and threat of theft too is eliminated.
Although these inherent qualities enhance the investibility of gold as a sure-shot safe option, but the experts still warn the investors against being overtly defensive based on the abnormal current economic conditions.
Historically, gold has proved to be safe bet, this is an undeniable fact. But equally undeniable fact is that the fundamental jewelry demand of gold has been shrinking over the years right from 1997. And it has been the financial demand that has seen the tremendous increase during the past decade and catapulted gold to this price point. And if things don’t turn out to be as gloomy for the global economy as everyone has been predicting then the financial demand for gold might just turn out to be a mere passing phase and the myth of gold financial indestructibility might be broken.
Another view is the gold should not be considered as an investment option at all. It doesn’t generate any cash flow while it lies stashed away in lockers. It’s valuable because it is scarce, because it has been used as a store of wealth for millennia and because someone will definitely buy it for a price higher than the original buyer purchased it for. As such it proves itself only as a hedge against market variation, however useful that hedge might be but it remains that only – a hedge, and not a full blown investment tool.
That is why experts suggest gold to be a part of every investment portfolio today but without ever dominating that portfolio.