Showing posts with label Investing in Gold. Show all posts
Showing posts with label Investing in Gold. Show all posts

Sunday, August 14, 2011

Investing in Precious Metals - Gold, Silver & Platinum

Ever since man created money and started to understand the value of money, gold and silver have been recognized as valuable and precious. Even today, precious metals have their place in a savvy investor's portfolio. But, not many of us know how to invest in precious metals and what precious metal to invest in. The purpose of this article is to elaborate on the same.

Gold

Let us start with the big-daddy of them all: gold.

Gold is unique for its durability (it doesn't rust or corrode), malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewellery and as a form of currency.
The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new mine supply is vastly outweighed by the sheer volume of above-ground, hoarded solid gold. Simply put, when the hoarders feel like selling, the price drops. When they buy, new supply is quickly absorbed and the gold prices are driven higher.
Several factors cause an increased desire to hoard or buy the precious yellow metal:

1. Systemic Financial Concerns
When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought as a safe store of value. To understand more on the reasons to buy Gold read this earlier article I had written. Click Here
2. Inflation
When real rates of return in the equity, bond or real estate markets are negative, people regularly move to gold as an asset that will maintain its value.
3. War or Political Crisis
War and political upheaval have always sent people into gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination.

As you can see, Gold has been and will be one of the most sought after precious metals in the world.

Shining Silver

Silver too has been a valuable precious metal for ages. Though not as valuable as Gold, Silver too is treated with respect and bought by many for various reasons. Unlike gold, the price of silver swings between its perceived role as a store of value and its very tangible role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.

So, while silver will trade roughly in line with gold as an item to be hoarded (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on price.
Several factors cause an increased desire to hoard or buy the precious white metal:
1. Silver's once predominant role in the photography industry (silver-based photographic film), which was been eclipsed by the advent of the digital camera. (Lesser Demand)
2. The rise of a vast middle class in the emerging market economies of the East, which created an explosive demand for electrical appliances, medical products and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired commodity.
3. Silver's use in batteries, superconductor applications and microcircuit markets.
It's unclear whether (or to what extent) these developments will affect overall noninvestment demand for silver. One fact remains; silver's price is affected by its applications and is not just used in fashion or as a store of value. (Like Gold)

Though the usage of silver in the above said 3 areas may drive the price of silver, analysts and experts agree that the price of silver is moving in-line with gold and in fact, the % in rise of price of Silver has been much higher than the % rise in price of gold in the past few years.

Platinum Unleashed

Platinum has been unleashed into the world jewellery markets only recently. It has even surpassed Gold as the costlier precious metal. Like gold and silver, platinum is traded around the clock on global commodities markets. It tends to fetch a higher price than gold during routine periods of market and political stability, simply because it's much rarer and far less of the metal is actually mined from the ground annually.

Other factors that determine platinum's price include:

1. Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewellery accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest of the available platinum.
2. Platinum mines are heavily concentrated in only two countries: South Africa and Russia. This creates greater potential for cartel-like action that would support, or even artificially raise, platinum prices.

Investors should consider that all of the above factors serve to make platinum the most volatile of the precious metals.

Now that we know how good and useful these 3 precious metals are, lets take a look at how you can buy them.

1. Commodity ETFs:
Exchange traded funds exist for all three precious metals, but apart from the London Stock Exchange (LSE) I am not sure if there are exchanges that offer ETFs for platinum. ETFs are a convenient and liquid means of purchasing and selling gold, silver or platinum.
2. Common Stocks and Mutual Funds:
Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wiser to stick to funds with managers with solid performance records.
3. Futures and Options:
The futures and options markets offers liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits - and losses - can be had with derivative products. (You can check out Trading options Gold and Silver Futures Contracts to leverage this option.)
4. Bullion:
Coins and bars are strictly for those who have a place to put them. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright difficult & risky to hold.

To finish with, the million dollar question “Will Precious Metals Shine?”

Precious metals offer unique inflationary protection - they have intrinsic value, they carry no credit risk and they themselves cannot be inflated (you can't print or produce more of them). They also offer genuine "upheaval insurance", against financial or political/military upheavals.
From an investment theory standpoint, precious metals also provide low or negative correlation to other asset classes like stocks and bonds. This means that even a small percentage of precious metals in a portfolio will reduce both volatility and risk.

So, to sum it all up, Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is to know your goals and risk profile before jumping in. The volatility of the precious metals can be harnessed to accumulate wealth, but left unchecked, it can also lead to ruin.

Thursday, March 26, 2009

Four Reasons to Buy Gold



For ages gold has been one of the most sought after investment option for people. Be it investors like us or women of the household, gold has been one of the top priorities. Gold analysts have been boasting of the potential returns gold can provide over the past few years. Gold prices have been in an upswing ever since the market started to go down. The price of gold was Rs. 9,000/- for 10 grams in 2007 and Jan 2008 it was more than Rs. 10,000/- Last month the price of gold was nearly Rs. 15,000/- for the same quantity 10 grams. This is the all time high the price of gold has touched. Even now our gold analysts are continuing with their buy advice.

Gold is the only asset class that has provided consistent positive returns over the years. Especially in such testing times it has outperformed all other asset classes including the stock markets and real estate. Analysts feel that the price of gold would touch Rs. 18,000/- for 10 grams by the end of this year 2009.

Below are 4 compelling reasons for us to consider gold as an investment option for this year.

The Global Economy would remain affected

The world economy is in serious trouble and is likely to remain the same in the forthcoming months. The global growth forecast for this year is less than 1%. This is slowest growth forecasted in the global economy. We expected the growth to be around 2% for this year last year but our forecast proved to be wrong. A realistic estimate would be around 0.5 to 1%

In such difficult times gold becomes an automatic choice for our investors. Investors are searching for safe havens for their investment and with the kind of capital preservation gold offers; it is the number one choice. Some top mutual fund managers are worried about the trend in the market. Investors are buying gold like there is no tomorrow. This has further impacted the slowing economy and stock markets.

Because of the activity in the Gold ETF markets and the commodity markets the price of gold is constantly going up and a price of around 17,500 – 18,000 seems to be very possible.

US Dollar may depreciate against global currencies

The price of gold and the value of the dollar have an inverse relationship. If the value of the dollar drops, more dollars would be required to buy the same quantity of gold. So the value of gold stays unchanged but the devaluation of the dollar pushes its price up. If the dollar declines against other currencies it would decline against gold as well. This negative correlation may not be so evident on a daily or weekly basis but this would be very significant when checked on the long run.

Some analyst’s world wide feel that the US government may resort to printing more money in the coming months to tide over the financial crisis. This may have a negative impact on the economy. This could push up inflation and cause the price of the dollar to slide further. This would naturally push the price of gold further upwards.

Crude oil prices could bounce back to $65 a barrel

Gold and crude oil prices always move hand in hand. At least that is the general trend over the years. When the price of oil goes up it leads to high inflation which in turn makes gold an attractive investment option.

In July 2008 we saw oil touch an all time high of $147 per barrel and then it started slipping. The fall in crude prices was because of heavy drop in demand in the second half of 2008. In spite of this correction and its price reaching around $40 per barrel now, gold is still going up.

Analyst’s world wide feel that the price of oil may bounce back and reach around $65 - 70 per barrel. This puts gold in a sweet spot. It will be a good hedge against deflation if the economy does not improve and at the same time, it would be a good investment option to counter inflation. Either ways the price of gold would go up.

Global Demand for Gold would Exceed its supply

The demand for gold is around 3500 tonnes in a year. This includes gold required for jewellery, the commodity markets etc. but the production of gold is only around 2500 tonnes which brings us to a situation where there is a straight excess demand of nearly 1000 tonnes. Also gold mining countries worldwide are cutting down on their production owing to fears of the global recession. This would further fuel the demand for gold and its price would continue the upward movement.

What should we do now?

Don’t buy gold right away. Experts are expecting a correction in gold prices due to profit booking. Also there is a certain seasonality in the price of gold. Usually gold prices tend to peak out in March and then fall a bit before resuming its upward journey. So buy only 10-15% of what you plan to invest in gold and then wait for the correction. Once the correction happens, buy more. Buy in a staggered manner and do not invest all your money in one shot.

Also remember the importance of asset allocation. No asset class should have an inordinately large part in your investment. Decide on proper asset allocation and make sure that the fluctuation in prices of one asset does not affect the value of your portfolio heavily. An ideal allocation for this precious yellow metal would around 15% of your portfolio’s worth.


Happy Investing!!!

Tuesday, December 30, 2008

Gold as an Investment

The concept of buying/holding Gold has been followed for ages. Gold has been one of the most sought after precious metals for generations and people have been crazy about owning gold always. In olden days the amount of gold possessed by a king signified his power. In the modern times the amount of gold in the reserves signifies the strength of a country's economy. It is an unsaid truth that Gold symbolizes wealth.

Gold as an Investment option is very attractive. When I was in my school my mom used to buy 10 grams of gold at the price I get her 1 gram now. That is how much the price of gold has gone up in the past 10 years. Also, gold is a limited resource. In India especially we do not have many gold mines that have been able to consistently produce as much gold as some nations around the world are producing. So considering these 2 factors Gold is a very attractive and a comparatively safe investment option.

What kind of returns you can expect from Gold?

The typical returns from Gold would range from somewhere around 10% or even more year on year. The amount of increase in the price may vary based on a variety of reasons but the consistent upswing in the gold prices is happening for years and would continue. Also it is a safe investment option where your gold is worth as much as the price of gold in the international market. It is not as risky as the stock market and hence the risk of holding gold is very minimal.

What affects Gold prices?

The price of gold is ultimately driven by the Supply & Demand theory. When the demand for gold exceeds the supply the price goes up. Yearly 2500 tonnes of gold is mined all around the world and the demand for gold is approximately 3500 tonnes. This means the demand for gold is a 1000 tonnes more than what is being mined all over the world. This translates into a steady increase in demand as well as the price of gold.

In general gold becomes a very favorable investment option during some situations like Economic Crisis, Depression, Recession etc. During these periods the returns on investment on other forms of investments like Stocks, Mutual funds, Real estate etc is negative. During such times the demand for gold goes up heavily. People take out their investment in other avenues out of fear of loss and invest into safer avenues like Gold or bank deposits. This causes the price of gold to go up drastically. The price of gold per 10 grams has gone up by nearly Rs. 1000/- in the last 6 months.

Methods of Investing in Gold:

The various methods in which one can invest in Gold are:

1. Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be bought or sold "over the counter" of the major banks. Alternatively, there are bullion dealers which provide the same service. Bars are available in various sizes, for example in Europe these would typically be in 12.5kg or 1kg bars, although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1 Tola.

Gold bars can be held either directly (i.e. held directly by you or in your own safe) or indirectly (held in a vault on your behalf). Banks in Switzerland offer this service of holding gold in Vaults on your behalf.


2. Coins

The most common way of investing in gold is by buying gold coins. These coins are available in jewelery shops all over the country. They come in weight ranges starting from 1 gram and are usually in the sizes of 1g, 2g, 4g, 8g. This is ornamental 22 Karat gold that is bought and sold at the price of gold in the international market.

Of late many banks in India are selling gold coins with certificates of purity and genuineness.

Note: The coins sold by banks are 24 Karat gold. They are sold at a premium when compared to the market price of gold because of the cost involved in packaging and certification of the gold. Most importantly banks would not buy back these gold coins. You would have to sell them at the nearest jewelery shop. You might lose a little money in this selling process.

3. Exchange Traded Funds

Exchange Traded Funds are the latest means of investing in Gold. Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London, New York and Sydney. The first gold ETF, Gold Bullion Securities (ticker symbol "GOLD"), was lunched in March 2003 on the Australian Stock Exchange, and originally represented exactly one-tenth of an ounce of gold. Due to costs, the amount of gold in each certificate is now slightly less. They are fully backed by gold which is both deposited and insured. The inventory of gold is managed by buying and selling gold on the open market.

Many investors who wish to hold gold on a long term basis find the Exchange Traded Fund method to be expensive as annual costs can range from 0.40% to 0.50%. For investors holding gold over the long term these costs add up. The major difficulty is that the costs are deducted as a reduction in physical bullion held. Thus the investor not only pays each year but loses the future performance of the bullion that has been deducted.

Gold ETFs represent an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars. Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged. The annual expenses of the fund such as storage, insurance, and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. Economies of scale, liquidity, and ease of purchase and sale make ETFs an increasingly popular method of investing in gold.

Benefits of Investing via Gold ETF's

1. You can buy quantities as small as 1 gram
2. You can buy them at the convenience of your home/office. All you need is a system with an internet connection and a valid DEMAT account
3. You need not bother about safeguarding your gold. The ETF provider takes care of it
4. You can sell it on any working day when the markets are open


UTI Gold Exchange Traded Fund

On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund (NSE: GOLDSHARE) on the National Stock Exchange of India. The objective of UTI Gold Exchange Traded Fund is to endeavor to provide returns that, before expenses, closely track the performance and yield of Gold. Every unit of UTI Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted under the scheme will be credited to investors’ demat accounts.

Furthermore, there are many more ETF's HDFC Gold ETF, ICICI Gold ETF, Benchmark GoldBees etc are gold based ETFs that invest in gold and can be bought and sold as shares.


Happy Investing...
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