Posted On Wednesday, Dec 17, 2014
Gold is no longer an investor`s choice asset. After declining from the peaks of $1900 per ounce in 2011 to below $1200 in 2014 investors in gold have had a vexing time. Nevertheless we believe gold should not be written off. In our view this may be the time for those investors without any exposure in gold to start investing in it. Here are some compelling reasons to have gold in your investment portfolio.
i. Gold – the eternal store of value
We have all come a long, long way in how we trade goods and services and make payments; from the barter system, to currency, to fiat money. And today paper currency is being replaced by cashless transactions using cards and chips. Yet globally gold is still viewed as the great “store of value”.
When there is turmoil in the economic environment or when they feel the threat of it, central banks flock to gold. They do for various reasons: diversify their reserves from their $-backed assets, to hedge against inflation, due to the liquidity of gold. Gold has maintained its purchasing power over the decades. Considering the statistics in the hyperlinked article, in over 40 years from the year 1974 to year 2014, the rupee has depreciated by 99% with respect to gold! It took 647 grams of gold to buy Rs. 10,000 in the year 1973-74 whereas today, in 2014 it takes just about 4 grams of gold to buy Rs. 10,000.
ii. Gold is one of the good diversification tools
Gold would provide the much needed cushion to your portfolio when equities and bonds are in a damp phase. When all is well – the major global economies are stable, their equities are performing decently well and their interest rate levels are up from the bottom, gold would generally remain dull.
But no one knows when the next shock might come or where it might come from so it is better to have a good diversifier to own gold. In our view, as a retail investor your portfolio can have anywhere between 10-15% in gold investments.
iii. Gold prices near bottom
Gold prices have been hovering near what is considered by many as the support price of $1200 after dipping below the level this year. The average global cost of gold production is thought to be $1200 an ounce. Under normal circumstances it is not likely for the price to stay below this level for long. Because if it does, it would make it unviable for miners in many locations to continue production.
However, as has been pointed out in the latest monthly Fund Manager View for gold, the current momentum in prices is downward and it’s difficult to predict where the bottom lies. Prices can fall below the cost of production and lie there for a good amount of time as it did during the 1999-2001 phase where it bottomed out. However, it adds, the fact that the long term drivers of gold are still in place creates an argument to own gold as an allocation.
Whether gold prices will soar in 2015 or they will have a slow rise over the next 3-4 years nobody can vouch for sure. But we believe gold as an asset class is a must-have in every investor’s portfolio.
Buy gold the smarter, convenient way
Through mutual funds you’d be buying gold the smarter and convenient way –
i. You can invest online in gold ETFs or gold savings funds with the click of your mouse, from the comfort of your home, or even on the go with Quantum’s online investment process, which is completely paperless.
ii. Investment can be made in affordable amounts. Minimum investment in gold savings fund is around Rs 500; for gold ETF this is 1 unit. 1 unit in Quantum Gold Fund# is equivalent to ½ a gram of gold. Thus you can accumulate gold in quantities as less as ½ a gram, as frequently as you like. Moreover buying gold in the form of mutual fund units is not only convenient but also reliable and cost-effective. Gold ETF takes away the worry about quality as the gold is sourced from London Bullion Market Association approved refiners. No losing sleep over thefts, storage and costs associated with it as the fund house takes care of all risks of storage and safety for the minimal expense ratio you pay.
The benefits don’t end there… Owning gold in the physical form, as jewelry, coins or biscuits, attracts wealth tax. Mutual fund units are exempt from wealth tax. No paying the premium that gold retailers and banks demand, and you’re free of the grave concern of the resale value of physical gold which retailers often try to lower stating reasons like purity.
Choosing between gold ETF vs gold savings fund
A gold savings fund invests in the units of gold ETF. A gold ETF in turn invests in gold bullion. In addition to units of gold ETF, a gold savings fund would also have a cash component. This accounts for the difference in the NAVs and performance of gold ETF and gold savings fund. As such the performance of gold ETFs would be more aligned to that of actual gold prices in the international market.
For a gold ETF you’d require demat & trading accounts as units of the ETF are bought on the stock exchange where it is listed. The process of investing in it is similar to investing in stocks. You can buy as many units, as often as you find appropriate. In case of gold savings fund you have the options of SIP, STP and SWP.
Choose wisely about which is the best way for you to invest in gold after consulting with a financial advisor. In case of queries kindly call us on 1800 - 209 - 3863 / 1800 - 22- 3863 or write to us at [email protected].
Source: Bloomberg, World Gold Council
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
Note: Risk is represented as:
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